Apple’s 6,000% Rally Began With ‘Stretched’ P/E of 165

Oftentimes Federal Reserve reports can serve as a good treatment for insomnia, but last week’s may be keeping investors in growth stocks up at night.

If you’ve been losing any beauty rest over the Fed’s remarks about stretched valuations in some stocks last week, consider this: The world’s biggest company had a price-to-earnings ratio of 165 a little more than a decade ago. That’s higher than all but one of the current valuations for the 121 stocks in the Nasdaq Biotech Index and all but two of the companies in the Nasdaq 100 Index. (To be fair, this excludes unprofitable companies in both gauges, but you get the drift.)

You probably don’t need to be told what happened to Apple’s stock after reaching that lofty P/E in September 2003, but here it is anyway: It rallied almost 6,000 percent.

Of course, not every growth stock today offers a chance to invest in a company that will create a device to serve as your stereo, calculator, camera, guitar tuner, taxicab dispatcher or whatever else an iPhone does.

Still, a look back at some other richly-valued stocks a decade ago is illuminating. The second-highest P/E in the Nasdaq 100 on July 21, 2004, was Comcast Corp. at 186 times earnings. (The highest was Comverse Technology Inc., which was later acquired.)

Time Machine

Comcast is up about 190 percent since. (It wasn’t a smooth ride, of course: The shares lost about 63 percent peak-to-trough in 2007-2009.)

There are some duds on the list. Yahoo! Inc. is only 18 percent higher over the decade, Juniper Networks Inc. has risen 6.4 percent and BlackBerry Ltd. has tumbled more than 50 percent.

But overall, get this: buying the most-richly valued stocks in the Nasdaq 100 a decade ago was not a bad trade (again, excluding unprofitable companies.) Inc. is up more than 700 percent and Biogen Idec Inc. has rallied about 450 percent.

Even excluding Apple -- and two companies that have since been acquired -- the stocks with the top 10 highest P/Es in the Nasdaq 100 a decade ago are up an average of 185 percent since. By comparison, the index itself is up 184 percent and the Standard & Poor’s 500 Index is 80 percent higher.

Apple will release earnings after the bell today, and the report is unlikely to show the kind of growth that propelled it up 6,000 percent into the world’s largest company by market value.

So is the world’s biggest stock of 2024 lurking somewhere at the top of the stretched valuation charts? Who knows. Might as well sleep on it.

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