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Associated Press
The Nasdaq Composite stock market, located in New York’s Times Square, is rising fast but still far below its late ’90s peak.

Nasdaq hoping to soar again

Investors say index is less risky as it seeks dot-com peak

– It takes a long time to recover from a bad hangover, especially when you party like it’s 1999.

The Nasdaq Composite is up 35 percent this year, but while other major indexes like the Dow Jones industrial average and Standard & Poor’s 500 have celebrated all-time highs again and again, the Nasdaq remains 20 percent below its dot-com peak of 5,048.62.

That’s a good thing, because the biggest beneficiary of the late ’90s Internet mania was also its biggest victim. After cresting March 10, 2000, the index lost nearly 80 percent of its value over the next two years, touching bottom Oct. 9, 2002 at 1,114.11. The Dow fell 27 percent over the same period, and the S&P 500 dropped 44 percent.

Even as it soars faster than other indexes, the Nasdaq isn’t what it was. While still tech-heavy, it’s more diverse, reasonably valued and loaded with profitable companies, investors say.

“The Nasdaq is very different, in every measurable, quantifiable way, than it was,” says Gavin Baker, who manages nearly $10 billion in assets for the Fidelity OTC fund.

Technology companies make up a smaller percentage of the index, roughly 42 percent, compared with 56 percent 13 years ago. The telecom industry is a little less than 2 percent, compared with 18 percent back then.

And consumer-focused companies such as Amazon are a much bigger part of the index, making up 22 percent, compared with basically zero in March 2000.

The Nasdaq recently passed the 4,000 mark, a level last seen in September 2000. But that doesn’t mean its stocks are back in a dot-com-like bubble. Yes, it’s still riskier than the Dow and S&P 500, investors say, because it contains hundreds of small companies and is heavily exposed to technology. But it is significantly less risky than it was.

When the bubble was at its biggest, the index had a price-to-earnings ratio of 194:1, which means investors were paying $194 for every $1 of earnings the companies in the index brought in. Today, the Nasdaq’s P/E is around 23.5, according to FactSet.

What powered its lofty valuation in the go-go years? It was companies like Pets.com and Webvan, which were never profitable and which investors valued based on “cash burn rates” and “eyeballs” instead of sales and profits. Now, Pets.com and Webvan, and those metrics, are dead and buried.

While Nasdaq’s current rise can be partly credited to technology companies, these “new” tech names are much different from the ones that went public in the late 1990s.

Google, a Nasdaq company, debuted in 2004 when it was already profitable. Facebook, one of the index’s largest companies, has enjoyed solid profits and strong revenue growth.

And Apple, which has been a public company on the Nasdaq since the early 1980s, has seen mammoth growth. In March 2000, Apple was a $20 billion company that hadn’t released the iPod. Today, it’s worth $500 billion.

Still, the stock market is unlikely to keep rising at its scorching 2013 pace, so the Nasdaq is two years away, maybe more, from erasing all its Internet bubble losses.

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