Another Dot Com Bust?

The S&P 500 is trading up, near a 52 week high. This would make investors happy if it were not for the narrowness of the rally. Market Watch remarks on the similarity to the period before the dot com bust.

In the last 20 years, the only other times we have seen less than 55% of components above their 200 DMA while the SPX was within 2% of a 52-week high have been ’98-’00, October 2007, and July/August of this year. In other words, the narrowness of this market is unlike anything we’ve seen since the period preceding the dot-com bust.

In the last year the S&P 500 has gone up and down and ended 1% up. The top ten stocks by market cap have gone up 14%. All the rest of the stocks in the S&P 500 are down 6%. We wrote recently about avoiding penny stocks and about seeking low P/E ratio bargain stocks instead of the big cap stocks that are trending way too high. History tends to repeat itself. When investors pile into stocks for the wrong reasons they distort the market and the market always corrects. Will we see another dot com bust?

Dot Com Bust

The dot com crash occurred from March 2000 to October 2002 during which the NASDAQ Composite lost 78%, falling from 5047 to 1114. Investopedia describes the dot com crash.

The rise in usage [of the internet] meant an untapped market–an international market. Soon, speculators were barely able to control their excitement over the “new economy.”

Companies underwent a similar phenomenon to the one that gripped Seventeenth century England and America in the early eighties: investors wanted big ideas more than a solid business plan. Buzzwords like networking, new paradigm, information technologies, internet, consumer-driven navigation, tailored web experience, and many more examples of empty double-speak filled the media and investors with a rabid hunger for more. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever.

The result was, of course, that investors started to question the situation and began to sell. A trickle turned into a deluge and led to the dot com crash. This is the pattern with any market crash. The market is bid up for the wrong reasons and becomes overpriced. The 2008 crash leading to the Great Recession followed in the footsteps of the dot com crash but was substantially larger and more destructive. If we are looking at the makings of another dot com crash what should investors do?

Safe and a Bargain

When everyone is prospecting for gold the best business is selling picks and shovels or so went sound advice in the gold fields of California. We wrote about low P/E bargain stocks. The point is to find stocks that first of all have not been bid up beyond their intrinsic value and stocks that will weather a market downturn. The Street suggests 3 bargain-priced dividend stocks.

When you shop for the stocks of dividend aristocrats, publicly traded companies that have increased their dividends consecutively for the last 25 years, you obviously can expect dependable dividend yields, but did you know you can also find bargain stocks that will appreciate in value?

Here are three stocks with good dividend yields that are trading at bargain-basement prices.

The three stocks suggested are Walmart, Target and Johnson & Johnson. All of these stocks have reasonable P/E ratios, a long history of quarterly dividends and are positioned to be recession or market crash proof. Stocks of this sort are probably ones that you might buy before another dot com bust. As always do your own homework before investing.

Another Dot Com Bust? PPT

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