This year's Nasdaq 100 rebalancing, which takes effect at the open of trading Monday, suggests that once-bitten investors have a taste for Kool-Aid again. Here's hoping that with two extra years under their hoods, however, yesterday's bubble stories can show a little more staying power this time around.
The new ranking of the 100 largest nonfinancial stocks in the
, in terms of market capitalization, brings back memories of the late 1990s. Think
Research in Motion
, which is one of the additions.
Two other former highfliers,
Level 3 Communications
, are also joining, after previously being dropped from the index.
"Given how the market has exposed itself to highfliers over the past year, the rebalancing makes sense," said Robert Parks, a futures trader at Citigroup Global Markets. "It suggests that, on some level, investors have started to believe in these stocks again."
That belief is not without merit. Seven of the eight Nasdaq 100 nominees are profitable, Level 3 Communications being the exception. Communications equipment provider
has made money for at least the past two years.
, Research in Motion and Lam Research reversed year-ago losses in their most recent quarters.
The only nontechnology addition, private school operator
, is also in the black, although the company has recently been accused of record-keeping malfeasance. It has denied the claims.
After three years of losses, the Nasdaq 100 is up 45% this year. Reflecting that performance, there were only about half as many changes made to the index in 2003 as in 2002. That year, a chemical manufacturer, retailer, power producer and health care provider were brought into the fold.
In 2003, deletions included
Human Genome Sciences
RF Micro Devices
. All but one of those companies, Brocade Communications, lost money in its latest quarter.
The rebalancing is significant because index funds that track the Nasdaq 100 will have been required to pick up the additions and dump the deletions by Friday, which marks quadruple-witching expiration.
Conventional wisdom has been that stocks added to the Nasdaq 100 benefit for that reason, while those taken off suffer. But that is not clear. "The stocks being eliminated from the benchmark have been beaten down and have bounce-back characteristics," said Steven DeSanctis, a small-cap strategist at Prudential.
"Moreover, the names being added have performed well and already have high multiples," he added.
That's true of Marvell, which trades at a price-to-earnings ratio of 39 using next year's Thomson First Call estimate. Intersil fetches 29 times next year's consensus, while ATI gets about 24 times, Research in Motion gets 44 times its fiscal 2005 estimate, and Lam Research gets 97 times next year's estimate.
Since Dec. 12, when the Nasdaq 100 rebalancing was first announced, the additions have slipped 2.5% on average. Meanwhile, the deletions have lost only 3.4%.