Talking Bubble With CREF Manager Greg Luttrell

Nasdaq 5048 remains far off in the future, but plenty of tech companies look promising now.
By Gregg Greenberg ,

Who said anniversaries always have to be happy?

Five years ago today the tech-heavy

Nasdaq

topped out at 5048 -- roughly 2 1/2 times its current level. During its prolonged slide, the index came to symbolize many of the excesses of the stock market. As a result, many investors who suffered steep losses have pledged to never again entrust their hard-earned dollars to stocks.

(

TheStreet.com

offers

five lessons from the bubble and how to avoid such losses in the future.)

Nevertheless, the past five years have not been an entire loss, as the quality of tech companies has improved and the public's financial awareness has evolved. Furthermore, as Greg Luttrell, portfolio manager of the $540 million

(TIGEX)

TIAA-CREF Growth Equity fund, points out, much of the original promise of the Internet -- the engine behind the bubble -- has been realized. In Luttrell's view, the problem was that it just took a little longer than people expected.

TheStreet.com

asked Luttrell to reminisce a bit on the causes of the bubble, how far we've come since the Nasdaq hit its peak and whether it will ever revisit that now infamous number.

Looking back, what do you think caused the tech bubble in the stock market?

The promise of the Internet combined with the capital spending boom really drove the tech bubble. And with regard to the promise of the Internet, that actually came true for a number of companies. It just took longer to happen than people expected.

So did Wall Street get too far ahead of the tech companies?

All the parties involved got overly excited way too quickly. That includes Wall Street, public investors and the companies themselves. No singular entity is entirely to blame.

Now that we are five years removed from the top, where are we in the cycle?

We've gone through a big chunk of the overspending and overhype period. People talk about a "hype curve" when a new technology bursts onto the scene. At the onset, there's a tremendous amount of hope that leads to the upturn. Then there is the rationalization that things are not going to happen as quickly as people originally thought, which causes a lot of pain and disbelief.

But people keep working at it, and ultimately the new technology takes hold and you enter a steady growth phase. That's the point I think we are at today, where spending and growth rates for Internet technology are becoming more realistic.

And the most interesting part of it will be what new companies emerge after this tech wreck. As you many remember,

Microsoft

(MSFT) - Get Report

and

Dell

(DELL) - Get Report

did not arrive on the scene until after the PC craze collapsed in the early 1980s.

To carry that another step further, Microsoft, Cisco (CSCO) - Get Report and other early tech winners are now being referred to as value stocks and cyclical in nature. Is this also part of the progression?

It makes sense. They have become more cyclical in nature and more dependent on capital spending, which is cyclical as well. When these companies were emerging, they were not as directly tied to capital spending because technology was not a huge piece of capex. Now technology is a large part of capex, so it grows in line with capital spending, including the cyclical ups and downs.

So you don't expect these particular companies to see the boom in spending they enjoyed in the late 1990s ever again?

I don't think so. The Internet was an immense project that required a large increase in spending and build-out. It's hard to imagine anything -- at least in the immediate future -- that would require the same type of spending.

We are seeing a run-up in energy stocks now. Are there any similarities between oil stocks and the tech run-up?

I don't play in the oil stocks as much. But you could make the case for certain similarities. For example, there may have been underdevelopment in the oil and energy space because a lot of that capital was diverted to technology. So it may be their time in the sun to receive a wave of investment dollars.

How will investors know when they have crossed the line between playing catch-up for underdeveloped energy companies into out-and-out speculation, a la the tech bubble?

Hindsight is 20/20, but there are probably a few good guidelines to follow when you think things have gone too far. In cyclical companies, you want to look at the marginal returns you are getting from your investment. When marginal returns start deteriorating while the stocks keep moving upward, then you have to wonder what's going on?

For example, there is a so-called boom in the housing market right now. So if you see companies spending more money to generate the same type of revenue from building homes -- and the stock prices are not reflecting that -- then you might consider the boom over.

From where are some of the new tech players going to emerge?

One of the most interesting companies that's come around now is

Google

(GOOG) - Get Report

. With high-speed Internet access into the home, search has been an easier function for people than during the days of dial-up. And that's transformed what you can do with online advertising. People can search more often and faster, which means more revenue for Google. And when you think about it, sponsored search did not even exist five years ago.

Five years ago, people said "search" for an item, now they say "Google" it. It's the same way people refer to a tissue as a Kleenex.

What about its mega-valuation of over 130 times trailing 12-month earnings? Didn't we learn from the bubble to avoid super-rich valuations?

The first question you have to ask is whether they have the earnings right. When the IPO came out last summer, people thought they were only going to earn $3 a share. But now 2006 earnings expectations are for $5. At an offering price of $85, that's not too high a multiple. You need to frame it correctly in terms of their earnings power.

OK. Here's the big question. Will we be getting back to 5000 on the Nasdaq anytime soon?

I was afraid you were going to ask me that. My gut says no, we won't get there anytime soon. However, while there are some very big companies that survived the tech bubble who won't ever see a similar growth rate again, there are also some smaller companies on the Nasdaq right now with explosive growth ahead of them. My concern is not whether the Nasdaq gets back to its heights, it is finding those growing companies.

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