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Stock Strategist

The Nasdaq Isn't a Sell--It Just Looks That Way

How Morningstar values the companies in the Nasdaq 100 Index.

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There's been a lot of talk lately about the valuation of growth and technology stocks. In recent months, I have read numerous opinion pieces on this subject by journalists, academics, pundits, and money managers. All of these articles and papers came to a similar conclusion: Growth stocks, and technology stocks in particular, are dramatically overvalued. One money manager even claimed that the Nasdaq 100 is 60% overvalued. Many of these pundits came to this conclusion by looking at the aggregate P/E ratio of the Nasdaq 100, an index that includes 100 of the largest stocks listed on the Nasdaq exchange.

But there's a problem with these arguments: None of them has looked at the valuations of individual companies within the index. They all use aggregate data, such as the average P/E or P/B ratio of the stocks within the index. Even writers who claim to be disciples of Warren Buffett--in other words, those who think stocks should be valued based on the discounted value of future free cash flows--base their arguments on aggregate valuation shortcuts rather than discounted cash-flow (DCF) models for individual companies.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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