Stocks opened higher Friday and continued to climb into the close, putting the lid on another strong week for the U.S. equities market. Today's upside came even as data showed consumer sentiment fell as inflation expectations climbed.

Shortly after the open, the University of Michigan said its consumer sentiment index fell for a fourth straight month in November, slipping to 60.4 from October's reading of 63.8.

"While current and expected personal finances both improved modestly this month, the long-run economic outlook slid 12%, in part due to growing concerns about the negative effects of high interest rates," the report stated. Both year-ahead and long-term inflation expectations rose in November too.  

Inflation was top of mind during Federal Reserve Chair Jerome Powell's speech on Thursday, where he said the central bank is "not confident" interest rates are high enough to bring inflation down to its 2% target. This sent stocks tumbling and had the S&P 500 and Nasdaq Composite snapping their longest daily win streaks in two years.

Stocks rebounded today, though. At the close, the S&P 500 was up 1.6% at 4,415, the Nasdaq was 2.1% higher at 13,798, and the Dow Jones Industrial Average had gained 1.2% to 34,283. All three indexes closed higher on the week, as well.

Plug Power spirals amid "unprecedented supply challenges"

The Nasdaq outperformed even as several tech stocks tumbled after earnings. Plug Power (PLUG), for one, plunged 40.5% after the fuel-cell maker reported a wider-than-expected third-quarter loss. Revenue of $199 million also fell short. In addition, Plug Power pulled its full-year guidance, citing "unprecedented supply challenges" in the North American hydrogen network.

"After 13 consecutive quarterly misses on adjusted earnings per share, we are struggling to find a positive catalyst, given the excessive cash burn rate and the importance of raising capital (in a challenging capital market environment) to fund its growth prospects," says CFRA Research analyst Matthew Miller, who downgraded PLUG to Sell from Hold. 

Trade Desk (TTD) was another big post-earnings loser, slumping 16.7% after its results. While the digital ad company reported third-quarter earnings of 33 cents per share on $493 million in revenue – both figures higher than analysts were expecting – fourth-quarter guidance came in well below estimates.

The company told CNBC that the "transitory cautiousness from advertisers in certain verticals, such as U.S. auto and media/entertainment due to the strikes" was the reason for the weak outlook.

Cisco earnings, CPI, PPI on deck

Next week, Cisco Systems (CSCO, +1.1%) is the most notable tech name on the earnings calendar, with the networking equipment specialist set to report after Wednesday's close.

As for economic news, all eyes will be on next week's inflation data. The October Consumer Price Index (CPI) report will be released Tuesday morning, while the Producer Price Index (PPI) is due out Wednesday. 

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One of the primary reasons companies undergo stock buybacks is because it can have a salubrious effect on the shares that remain outstanding. Mathematically, this is true. 

A simple example will illustrate the point. If a company has 1 million shares outstanding, earns $2 per share and trades at $30 per share, it has a price-to-earnings (P/E) ratio of 15, i.e., $2 per share times 15 equals $30. But what happens if this company buys half of its shares back? Its earnings per share will become $4. If the market continues to value the company at 15 times earnings, the stock price should trade up to about $60, a big jump. 

Here, we look at some of the most aggressive buyers of their own shares. For instance, Marathon Petroleum (MPC) has bought back about 29% of its shares over the last four quarters according to FactSet. Steel Dynamics (STLD) has bought back about 11%, small by comparison, but still a big number. 

If you remain in a stock where buybacks are high, it's important to assess the overall health of the company, since a decline in earnings will ultimately take the shares down. Also important is to look at the stock buybacks relative to the cash the company is generating from operations.  

Large buybacks relative to cash flow can spell trouble if a company's fortunes change, but even absent trouble, it can also bring the buyback program to a halt. In that case, an investor is simply left with a company that must succeed on its merits and not its metrics. As a result, investors should not buy a stock because of buybacks, but fundamentally superior stocks that buy their own shares aggressively have the wind at their backs. 

Below, we take a closer look at six companies actively involved in stock buybacks.

Data is as of March 29. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. 

• Market value: $53.4 billion
• Dividend yield: N/A

Internet and cable provider Charter Communications (CHTR, $349.71) has been reducing its share count since 2016, when it reached a high of 270 million shares. This was also the year Charter purchased Time Warner Cable and Bright House Networks for $67 billion.  

Since then, Charter has whittled its share count which now sits at about 153 million shares.  According to the latest 10K filing, the company can purchase about $400 million under its  current authorization, which, at today's prices, could be another 1.2 million shares. 

Merger-related costs took the punch out of 2017 earnings, but since 2016, Charter has grown total earnings at 6.2% annually. Owing to the reduction in share count over the past six years, earnings per share have increased almost twice as quickly, at 12% average annually. 

The communication services stock has responded in kind, rising from about $175 to today's $350, a neat double. All of this was a bit more compelling in the summer of 2021, however, when CHTR shares reached a peak of more than $800. Still, a double is a double. 

Buying the buybacks is a strategy that works when you are in the stock for a long time, which begs the question of whether or not Charter is a good long-term hold. This may be more questionable. First, the cable and internet businesses are wracked by fierce competition and rapid technological change. Who knows what's next? Second, sales, earnings and margin growth, while positive, have been tepid at Charter.

The last item that merits a close eye at Charter is the amount of shares bought back in 2022 as a percentage of cash from operations. CHTR operations generated about $15 billion in cash last year, and the company bought back $10.2 billion in stock, a high ratio by some yardsticks.  

With capital expenditures at $9 billion, that means Charter is funding stock buybacks with debt. The company already has more than $97 billion in debt. With interest rates rising across the board, refinancing debt, if not less likely, is definitely more expensive and this could bring the buyback game to an end at CHTR.  

• Market value: $19.0 billion
• Dividend yield: 1.5%

The share count at Steel Dynamics (STLD, $110.04), which makes a variety of steel products, reached a high in 2016 at around 244 million shares. At the end of last year, the figure was approximately 175 million, a reduction of 28%.  

Since that time, earnings per share have grown at about 56% per year on average. Total earnings, i.e., profits before dividing by the number of shares outstanding, grew 47%, indicating that share repurchases drove earnings per share by about nine percentage points each year. 

If you have held onto STLD during this time, you have been richly rewarded, with shares rising from about $18 to the current $113. Shorter term, shares might be choppier. Spending that accompanied the recovery from COVID is abating. Further, 50% of revenues are construction-related, which is interest-rate sensitive, and would be susceptible to a recession, should one occur. And finally, the fortunes of STLD are tied to steel prices which it cannot control.

For now, however, steel prices are a benefit. Using rebar as a proxy for the market at large, prices bottomed out in November of last year at about $3,500 a ton, but have since risen 20% to the current price of roughly $4,200.  

A recession is in the offing, but against this possibility are a construction boom as China reopens and a generation shift in energy infrastructure for green, as well as traditional, power sources. When you look at a wind farm stretching off to the horizon, think steel.

Steel Dynamics is a well-managed company. Since 2016, It has acquired mills, built others and added additional capacity. While earnings and the return on equity have been lumpy during this period, overall, the trajectory is upward, and at intervals spectacularly so. 

Slated for 2024 is a biocarbon facility that will provide some of its mills with a renewable alternative to fossil fuel carbon. In 2025, a $2.5 billion aluminum mill is slated to come on line.

Finally, STLD offers a modest dividend, around 1.5% but has grown it on average about 17% annually since 2016.  

• Market value: $12.9 billion
• Dividend yield: 1.1%

Homebuilding is the kind of business that could easily, and perhaps justifiably give an investor the willies these days. Inflation is driving up the cost of materials, mortgage rates have been on the rise and there's the threat of a looming recession. And though this is the recession that never arrives, its looming prospect is making homebuyers twitchy. 

However, if investors only bought stocks under ideal conditions, they might never buy anything. 

The case for PulteGroup (PHM, $57.15) is the inexorable demand for new homes, a strong balance sheet, a strong market position backed with skilled management and a commitment to buying its shares back that has sent earnings per share soaring.

Pulte has been reducing its share count since 2012. Over the last five years starting in 2017, shares have shrunk from 287 million to about 226 million, a reduction of 21%. During this time, earnings per share have soared, growing from $2.24 in 2017 to last year's $11.01, or 37.5% average annually. Total earnings, i.e., not earnings per share, have grown at about 30% average annually, indicating that stock buybacks have seven and a half percentage points to earnings per share each year.

With such a stellar contribution to earnings per share, the wise investor might ask if PHM's financial performance can support continued buybacks. Maybe.

Pulte bought $1.1 billion of its own shares in 2022, but cash flow from operations was just $668 million. It didn't take out debt to fund these purchases, but largely drew down its cash on hand. In 2021, cash from operations was greater than share repurchases. The change was driven by a big spike in homes in inventory, almost doubling in 2022 to $2.3 billion and hoovering up a lot of PHM's cash in the process.  

The company authorized a fresh $1 billion for share repurchases about a year ago, and has about $383 million in dry powder. Earnings are expected to dip in 2023, so there may be a pause, but since Pulte has been reducing its share count every year for more than a decade, it may be the pause that refreshes.  

• Market value: $114.5 billion
• Dividend yield: 2.2%

In an inflationary environment, consumer spending typically takes a hit and Lowe's (LOW, $191.94), a home improvement retailer, has been hurt by this trend. Unsurprisingly, in its fourth-quarter results, the company reported a drop of 1.5% in its comparable sales versus year-ago figures. Earnings per share also fell to $1.58 for the quarter from $1.78 of the previous year. 

But while the short term looks uncertain for LOW, the stock merits long-term consideration due to its strong commitment to return excess capital to its shareholders. The company has been consistently reducing its share count every year, managing to decrease the number of shares by almost half, from 1.24 billion in 2011 to 670 million in 2021. In 2022, the company bought back 71 million more shares for a total of $14.1 billion. The Dividend Aristocrat also paid its shareholders $2.4 billion in dividends for the year.

Lowe's impressive cash flow generation, thanks to a strong gross margin of 33.2% and an admirable operating margin of 10.5% in 2022, sets the stage for continued stock buybacks. 

That said, the company's buyback activity has been aggressive relative to cash. For the nine months ended Oct. 28, year-to-date stock repurchases were $12.1 billion, while cash flow from operations was $8.1 billion. Lowe's investment-grade rating enables it to raise debt capital relatively easily, and it did during the first nine months of the year to the tune of $9.7 billion, which, de facto, financed some of the repurchases. This can continue, but cannot go on forever. 

While the company's 2023 outlook is muted, LOW remains confident in the medium- and long-term outlook for the discretionary sector, with plans of strengthening its Total Home strategy to establish itself as a one-stop shop for both DIY and Pro customers in the U.S.

The company's decision to divest out of its Canadian retail business, which was finalized last quarter, also indicates that Lowe's is ready to cut underperforming areas and focus on segments of its business with more growth potential.

LOW is now trading about 10% below its value a year ago. For investors who are looking for a stable company that provides a steady stream of passive income, the stock is worth considering.

• Market value: $44.1 billion
• Dividend yield: N/A

AutoZone (AZO, $2,395.37) has been aggressive with its stock buybacks for decades now, making shares very attractive, especially for long-term investors. In fact, the company's share count has gone down to less than a third of what it was 15 years ago – from 66 million shares in 2007 to just 19 million in 2022. It seems as if AZO management is taking the company private drip by drip. 

Fueling its share buyback program is AutoZone's healthy cash flow, maintaining its operating margin above 20% in the past decade, and growing its profit consistently over the same period.

Further, in the current environment where prices of new cars in the U.S. are going through the roof, and with higher interest rates, more consumers are deciding to hang onto their current wheels, even if it's a clunker. 

This is good news for automotive parts and accessories retailers like AutoZone, which saw 5.3% growth in same-store sales last quarter, and an increase of 6.9% in operating profit. In fact, AutoZone's same-store sales growth consistently beats growth in total auto parts sold at retail. 

Nevertheless, the same forces that help buoy AZO's profits could be a double-edged sword. That is, higher fuel costs and smaller wallets may tamp down driving altogether or cause consumers to seek other transportation alternatives altogether. Electric vehicles (EVs), while not immune to the auto parts business, require less maintenance, and for now, are too intimidating for most do-it-yourselfers.

AZO has been a consistent long-term buyer of its stock, but recently, it has been an aggressive buyer too. For instance, in 2020, share repurchases of about $930 million were about a third of cash flow from operations. In 2021, share repurchases were almost equal to cash flow from operations, and in 2022, the $4.44 billion in stock buybacks were $1.2 billion more than cash from operations. This is good for earnings per share, but levers up the company through the issuance of more debt. 

Mixing and stirring, this could mean that AZO eases back on share repurchases. After all, the debt needed to finance share repurchases in excess of cash from operations is going to be more expensive due to interest rate increases and may stay that way due to generally hawkish Fed policies. 

• Market value: $60.3 billion
• Dividend yield: 2.2%

Marathon Petroleum (MPC, $133.94), a crude oil refiner based in Ohio, has slowly but surely been repurchasing its own stock – from a high of 680 million shares in 2018, the company's share count now stands at 442 million. The share count reduction has driven an increase in earnings per share, albeit a lumpy one, but what's really driving MPC earnings are energy prices – making the stock worthy of consideration for investors to buy.

Longer term, stock buybacks will exert their influence, and Marathon is an enthusiastic buyer of its own shares, making nearly $12 billion of purchases during 2022. This was below cash provided from operations, which was $16.3 billion. In 2020, Marathon didn't purchase any stock, and in 2021 it bought nearly $5 billion, suggesting that its appetite may be tied to energy prices. 

Looking at short-term trends, the energy stock has benefited from the geopolitical uncertainties and sanctions imposed against Russia, one of the biggest oil and gas producers in the world. In fact, MPC almost doubled its net income in the most recent fiscal year, from $9.7 billion in 2021 to $14.5 billion in 2022.

With the reopening of China and easing travel restrictions due to COVID, as well as the continued unpredictability of the Russia-Ukraine war, things are looking good for MPC in the medium term. 

Additionally, crude oil prices are expected to firm up soon due to rising demand in spring as the weather improves. Gasoline inventories in the U.S. are currently at the lowest level in 10 years, so refiner stocks like MPC remain very attractive. Marathon is currently trading about 58% higher than its value a year ago.

Still, with the Fed still hiking interest rates, the looming threat of a recession could dampen demand. Regardless, the energy patch remains the oasis for the foreseeable future, and with MPC's strong fundamentals and prospects for the future, the stock is worth considering now. As they say, strike while the iron is hot.  

Wall Street closed out the week on a positive note, and with a resumption of the rotation into value stocks we've discussed over the past few days.

Friday saw several major indices finish in record territory, including the Dow Jones Industrial Average, which steadily rose throughout most of the day to finish 1.4% higher to 29,479.

Boeing (BA) got back into its early-week form with a robust 5.9% improvement. But it was Cisco Systems (CSCO, +7.1%) that led the Dow's 30 components after reporting better-than-expected revenues and profits while also providing hope that its four-quarter streak of revenue declines might soon come to an end.

"Some investors have expressed concern that Cisco risks becoming the IBM of several years ago, when that company masked a multi-year stream of quarterly revenue declines with share buybacks that artificially lifted EPS," says Argus Research analyst Jim Kelleher, who just reiterated his Buy rating on CSCO. "While IBM was being outflanked in new markets such as cloud, social and mobile, Cisco does not appear to be losing share; instead, its challenges mainly derive from pandemic-impacted demand."

"Cisco is also maintaining high pretax margins and continuing to generate strong free cash flows. The company is successfully shifting its mix away from hardware and toward an integrated software, hardware and services solution."

Cisco's report was hardly unusual, however: S&P 500 components have been knocking down profit targets left and right. "84% of S&P 500 companies have reported a positive EPS surprise for Q3," says FactSet's John Butters. "If 84% is the final percentage, it will tie the mark for the highest percentage of S&P 500 companies reporting positive EPS surprises since FactSet began tracking this metric in 2008."

Walmart (WMT) and Home Depot (HD) are among major companies that will report next week as the Q3 earnings season starts to wind down.

Outside of Cisco, tech continued to underperform, especially work-from-home plays. Zoom Video (ZM, -5.9%), for instance, just finished with a miserable week that saw the video-conferencing provider lose 19% amid vaccine optimism.

Other action in the stock market today:

• The small-cap Russell 2000 (+2.1% to 1,744) broke into record territory for the first time since August 2018.
• The S&P 500 closed up 1.4% to a record 3,585.
• The Nasdaq Composite gained 1.0% to 11,829.
• Gold futures contracts for December improved by 0.7% to $1,886.20 per ounce.
• U.S. crude oil futures settled 2.4% lower at $40.13 per barrel, but still finished the week up 8.1%.

Growth Will Be Just Fine

Looking to add a jolt of energy to your 401(k) in 2021 and beyond? Don't sleep on growth investing – yes, many analysts have been calling for a rotation into value, but many of those very same analysts expect that change in leadership to be temporary.

Sure, growth investing is more difficult to do in a 401(k) where you can't hold individual blue-chip growth stocks or high-potential small caps. But T. Rowe Price has you covered.

As part of our continued analysis of the 100 most popular 401(k) funds – including fund picks for retirement savers from Vanguard and Fidelity – we now take a look at T. Rowe Price funds most often found in 401(k) plans. Founder Thomas Rowe Price is considered by many to be the father of growth investing, so don't be surprised to learn that many of the firm's dazzling funds focus on fast-growing stocks.

Here, we examine a dozen T. Rowe Price products you might find in your 401(k) plan, and assign each of them a Buy, Hold or Sell rating.

Kyle Woodley was long BA as of this writing.

Some years, it hardly seems to matter whether you invest in growth or value strategies – all stocks move up together, or all stocks move down together. But in 2017, strategy has mattered in a big way. Mutual funds that invest in large, undervalued companies have returned a respectable 10.8% year-to-date on average. But funds that invest in large, growing companies have returned a whopping 24.4%.

It’s an impressive performance gap, but it’s likely not a sustainable one. That’s because much of the gains in large-cap growth funds can be attributed to the five stocks that make up the “FAANG” acronym: Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOGL). After posting heroic average returns of 48.2% so far this year, those stocks now trade at a whopping 58.7 times next year’s earnings estimates, on average. It’s hard to picture them delivering another bang-up year from such high valuations.

Instead, we suggest investors refocus their attention on bargain-hunting. We’ve profiled the five top-performing no-load mutual funds that invest in large, undervalued shares, as ranked by five-year performance. Each fund boasts stellar management and a solid long-term track record.

If the market wakes up one morning and decides it’s no longer in love with growth, these five value funds should benefit.

em>Data is as of Nov. 17, 2017, unless otherwise noted. Funds listed in alphabetical order. Click on ticker-symbol links in each slide for current share prices and more.

• Expense ratio: 1.05%
• 1-year return: 15.6%
• 5-year annualized return: 16.6%

At Boston Partners All-Cap Value Fund (BPAVX, $26.48), manager Duilio Ramallo has a big ocean to select stocks from – the fund may invest in American and foreign companies of all sizes. But mainly, BPAVX sticks to large U.S. firms – at last report, 66% of assets was invested in large companies, and 88% was invested in U.S. stocks.

Ramallo’s aim is to identify shares of companies that exhibit three characteristics: an attractive valuation, strong business fundamentals and catalysts for change or positive business momentum.

The fund’s two largest sector allocations at the moment are financial stocks, at 30.1% of assets, and technology shares (25.7%). The latter is an unusual focus for value investors – the average large-cap value fund holds just a 12% allocation to tech stocks – since tech generally is considered more the domain of growth investors. Top holdings include the likes of JPMorgan Chase (JPM), Citigroup (C) and Cisco Systems (CSCO).

The fund is a long-term winner, too, with an 11.9% annualized return over the past 15 years that has beaten 99% of peer large-cap value funds.

• Expense ratio: 0.52%
• 1-year return: 15.3%
• 5-year annualized return: 16.8%

Dodge & Cox is known for its deep-dive approach to investing, and that approach has served investors well at Dodge & Cox Stock Fund (DODGX, $201.09).

Bryan Cameron, director of research for the fund company, explains that analysts start their research process with publicly available information, then talk to clients, customers, competitors and suppliers, and finally meet with a company’s management before recommending an investment for the fund. Analysts and managers seldom leave the firm, which means over time the investing team gathers a deep, accumulated knowledge base of the companies it follows. In recent years, the fund’s typical holding period for a stock position has been more than five years.

In today’s market, Cameron says, the team has to look beyond bargain-basement stocks to build a well-rounded portfolio. They are finding some opportunities among financial stocks (DODGX’s largest sector holding, at 27.2% of assets), which still are feeling the pain of low interest rates, and among certain energy stocks (7.8%) that they feel will be well-positioned should energy prices rebound.

An added benefit of this Kip 25 member: The fund’s expense ratio is roughly half that of the average large-cap value fund.

• Expense ratio: 0.62%
• 1-year return: 19.3%
• 5-year annualized return: 16.1%

The Homestead Funds have an unusual origin story. The fund company was launched in 1990 to manage funds on behalf of a co-op of locally owned rural electric providers, say Homestead Value Fund (HOVLX, $54.86) co-managers Mark Ashton and Prabha Carpenter, in jointly emailed comments. “We’re a small team that had to find a way to invest prudently but opportunistically to grow the savings of employees of these rural electric co-ops,” the pair says. That original mandate still translates into a focus on avoiding losses.

Another quirk of the fund, as the managers say, is that it is “sector- and industry-agnostic.” Instead of chasing certain sectors or industries, management will follow “a particular idea until we find the investment angle that fits our risk-averse style.” For example, if they are looking for opportunities related to the growth of e-commerce, instead of only looking at retailers, they might also consider trucking companies. At the moment, the fund is heaviest in technology (21.4%), healthcare (17.2%) and financials (16.6%).

Finally, instead of mainly focusing on a stock’s cheapness, they take a more holistic approach – evaluating, for example, a firm’s managers and considering whether there might be a catalyst for growth in a specific business segment.

That approach has served investors well. Homestead Value Fund’s 9.8% annualized return over the past 15 years is better than 85% of peer funds.

• Expense ratio: 0.91%
• 1-year return: 19.3%
• 5-year annualized return: 16.1%
• Sound Shore Fund’s (SSHFX, $49.92) management team follows a disciplined, bottom-up stock-picking process, says John DeGulis, who has been a co-manager on the fund since 2003. The team first screens for U.S. stocks and ADRs trading for low price-to-earnings ratios, then runs an additional “value check” – looking at a range of valuation ratios to confirm that a prospective investment is, indeed, undervalued. Finally, the team digs in with traditional fundamental research, with one aim being to establish a company’s long- and near-term earnings power.

It’s unusual to find an investment-management shop that offers only one product. Even rarer is to find one that has managed that product well for more than 30 years. Parent company Sound Shore Management launched its eponymous fund in 1985, and the fund’s original managers, Harry Burn and T. Gibbs Kane, still are at the helm.

The team likes “financially sound companies that have underperformed and have lost Wall Street’s attention due to low expectations,” DeGulis says. For example, the fund first invested in Applied Materials (AMAT) – a supplier of equipment and services to the semiconductor industry – in 2010, when the Great Recession still was hanging over the stock. The team concluded Applied Material’s 3D chip technology and other products were going to become big earnings drivers. They were right – the stock has gained more than 300% since the end of that year. SSHFX still holds the position.

Sound Shore has returned 9.8% on average over the past 15 years, beating 85% of its peers. And the company says it has returned 10.2% annualized over the past 30 years through the end of the third quarter, besting the Standard & Poor’s 500-stock index's 9.5% annualized return over the same period.

• Expense ratio: 0.82%
• 1-year return: 17.6%
• 5-year annualized return: 15.9%

Manager Mark Finn has steered T. Rowe Price Value Fund (TRVLX, $38.81) – another Kip 25 fund – since the beginning of 2010. Finn says his goal in the fund is to seek out “high-quality companies facing some kind of controversy that through our work we determine to be temporary or addressable.” The fund also benefits from T. Rowe Price’s deep stock-research bench.

Although it held 117 individual stock positions as of last report – hardly making for a concentrated portfolio – Finn also isn’t afraid to load up the portfolio with big stakes in high-conviction names. He says much of the fund’s outperformance over time has come from those high-conviction picks.

Today, Finn says he’s seeing opportunities primarily in four areas: retail, media, energy and telecommunications. He likes Walmart (WMT), which he says “has the best chance of competing directly with Amazon” given its distribution capabilities and investments in e-commerce. Given ongoing disruption in the media industry, Finn says companies that offer “must-have” programming should fare best. He favors Twenty-First Century Fox (FOXA) for its “loyal following in sports and news.” Among energy companies, he likes EOG Resources (EOG), a shale producer that tends to operate more efficiently than industry peers. Lastly, Finn sees risk in the telecom sector, in part due to “intense price competition in their wireless business,” he says. But he’s still betting on Verizon Communications (VZ) and Crown Castle International (CCI), which he says should benefit as wireless technology moves to its fifth-generation, or 5G, iteration.

Fifteen years ago, on March 10, 2000, the Nasdaq Composite index peaked at 5048. Then it started to fall. And fall. And fall. Or, to use the popular metaphor, the bubble burst.

Looking back, anyone today can see that the big-capitalization technology stocks that dominated the Nasdaq were wildly overvalued by traditional measures. On March 14, 2000, the Wall Street Journal published an influential article titled "Big-Cap Tech Stocks Are a Sucker Bet,” by Jeremy Siegel, the Wharton School finance professor (and fellow Kiplinger’s columnist). Siegel argued that “many of today’s investors are unfazed by history—and by the failure of any large-cap stock ever to justify, by its subsequent record, a [price-earnings] ratio anywhere near 100.” The piece carried a table showing that the P/Es of many Nasdaq darlings were deep into triple digits. Cisco Systems (symbol CSCO), for example, had a P/E of 148; Oracle (ORCL), 153; Qualcomm (QCOM), 167.

Bigger fools. The nature of bubbles, however, is that no one can tell when they’ll pop. If the Nasdaq was overvalued in 2000, it was also overvalued in 1999 and 1998 and 1997. Investors rushed to buy stocks in the late 1990s so they would not miss out on the profits that their friends were making. The buyers, many of them overloading their portfolios with big-cap tech stocks, firmly believed they could sell to some greater fool who would always pay more than they did.

The trigger for the collapse of tech stocks wasn’t the economy. It was investor psychology, turning on one event: America Online’s $182 billion purchase in early 2000 of Time Warner, owner of Warner Brothers, CNN, HBO, Time magazine and much more. AOL was a celebrated company in the late 1990s, but it looks pretty paltry today. At the time of the merger, it was simply a dial-up Internet service provider with little content and just 20 million customers. The combined company, known as AOL–Time Warner, carried a P/E, according to Siegel’s table, of 217. It was the largest merger ever and, in the end, an utter disaster for shareholders of both companies. “To call the transaction the worst in history, as it is now taught in business schools, does not begin to tell the story,” the New York Times said in an article 10 years later. The AOL–Time Warner merger—so huge and so absurd—seemed to wake investors from their stupor. Siegel’s article, appearing four days after the Nasdaq peak, helped as well. On October 9, 2002, the Nasdaq Composite closed at 1114, a drop of 78% in 30 months. Even more significant, however, is the fact that the Nasdaq has not yet returned to its 2000 high.

The overall market, as measured by Standard & Poor’s 500-stock index, also plunged over the same period, losing nearly half of its value. But the S&P recovered within seven years, and today it is one-third above its 2000 peak. The Dow is now more than 50% above its high of 15 years ago. The Nasdaq, by contrast, was still 7% shy of its March 2000 record as of January 9.

Every investor can draw lessons from the tech debacle and its aftermath:

1. No specific stock or sector is destined to rise forever. What goes up and then down does not always go back up again. Even regaining 5048 will still mean real losses for the Nasdaq Composite. Although inflation has been relatively mild over the past 15 years, it has eroded the value of the dollar by about 30%, and Nasdaq’s tiny dividend yield (currently 1.3% and a microscopic 0.1% in 2000) doesn’t make up for the decline in buying power.

But forget inflation. Most of Nasdaq’s darlings at the top of the bubble haven’t come close to regaining their value. In 2000, the peak market cap of Microsoft (MSFT), then the world’s most valuable company, was $642 billion; today, it’s $389 billion. Cisco has fallen from $557 billion to $142 billion. Nortel Networks, a Canadian firm with a peak market cap of $283 billion, is in bankruptcy, and Lucent Technologies, once worth $285 billion, is now a part of Alcatel-Lucent (ALU), a French company with a cap of just $10 billion. (Market caps are as of January 9.)

2. It is nearly impossible for an investor to avoid being caught up in a stock frenzy of some sort. There’s always a reason—even beyond the greater-fool theory—to justify a high share price. In the case of the tech bubble of the late 1990s, it was that the Internet would revolutionize … well, everything. The truth is that it almost has. But its most important economic characteristic—tearing down barriers to entry in practically every business—has brought both fantastic innovation and the kind of vicious competition that is unkind to a stock’s price.

3. The best insurance against stock market disaster is diversification. Even if your investment horizon is decades long, it won’t help if you hold only a handful of stocks or sectors. Where many investors went wrong during the tech boom was in not rebalancing their portfolios. Imagine that in 1990, you owned a portfolio split evenly between the Nasdaq Composite and the Dow Jones industrial average. In a decade, your Nasdaq holdings rose by a factor of 12; the Dow roughly quadrupled. So as 2000 began, your portfolio was roughly 75% in Nasdaq stocks and 25% in Dow stocks. Such a lopsided portfolio simply begs for trouble.

The Nasdaq Composite is still dominated by a small number of mega-cap tech stocks. Fidelity Nasdaq Composite Index Tracking Stock (ONEQ), an exchange-traded fund, is designed to track the index, which contains roughly 3,000 companies. But the 10 largest stocks in the ETF represent one-third of its assets. Eight of those are tech companies, and one is Internet retailer Amazon.com (AMZN). Overall, tech makes up about half the assets of the ETF, compared with about one-fourth of the S&P 500’s assets.

The popular alternative to owning the Composite is to invest in PowerShares QQQ (QQQ), an ETF that tracks the Nasdaq 100, an index of the largest nonfinancial stocks on the Nasdaq exchange. But here you get an even more concentrated dose of large-cap techs. The top 10 stocks in QQQ (the same ones, of course, as those in the Nasdaq Composite) represent a whopping 47% of the $39 billion ETF’s assets. At the top of the list: Apple (AAPL), at 14% of assets; Microsoft, at 8%; and Google (GOOGL), at 4%.

I like many of the behemoths that dominate both of these ETFs—specifically, Apple, Microsoft, Google and Facebook (FB). But when investing in tech, I prefer smaller companies that have a chance to grow into bigger ones, rather than bigger companies whose growth rates are slowing. Consider an ETF such as PowerShares S&P SmallCap Info Tech (PSCT), whose largest holding is Maximus (MMS), a health-services consulting firm with a market cap of $3.6 billion.

If you must own the Nasdaq, then buy the Composite ETF rather than QQQ. Otherwise, cherry-pick the best big tech stocks, own funds that focus on small techs, or do the research to find great small techs on your own. But diversify. Realize that sometimes it takes 15 years for stocks to recover from a debacle—and some never do.

James K. Glassman is a visiting fellow at the American Enterprise Institute. He owns none of the stocks mentioned.