Ultimately, the Nifty Fifty collapsed, performing even worse than the S&P 500 in 1974. Some of the most heavily owned names ultimately fell more than -75% from their 1972/73 highs to their 1974 lows.

As it turns out, some of the Nifty Fifty had little real staying power. Kmart, then known as S. S. Kresge, and Polaroid were highfliers in the early 1970s. Both ultimately ended up bankrupt.

But that certainly wasn't the case with all of the Nifty Fifty. Many of these stocks were great companies with solid growth prospects that were simply trading at excessive valuations in 1972 and early 1973. It wasn't the companies that were the problem, but instead it was the prices investors were paying for those firms.

In fact, some of the Nifty Fifty highfliers ultimately became leaders in the powerful bull market of the 1980s and 1990s. From 1982 through 2000, for example, McDonald's and Disney (NYSE: DIS) both returned +21% annualized against a +18% return for the S&P over the same time period.

Market history has a habit of repeating. In the late 1990s and early 2000, technology stocks became the market's darlings. Like the Nifty Fifty three decades earlier, a long list of technology firms soared to unprecedented valuation levels.

For example, networking giant Cisco Systems (Nasdaq: CSCO) traded at 180 times earnings at its highs in the year 2000, while online retailer Amazon.com's (Nasdaq: AMZN) multiple was an even-loftier 325 times. As our chart shows, the S&P 500 technology sector as a whole traded with a price-to-earnings ratio of more than 75 in 2000. To justify these nosebleed heights, investors assumed the high tech New Economy would enable growth unprecedented in U.S. history.

Of course, the New Economy ultimately looked a good deal more like the Old Economy than many tech bulls cared to believe -- tech earnings growth ultimately came back to Earth in 2000 and 2001 and the sector collapsed. In the three years following the tech-heavy Nasdaq's top in March 2000, the index lost nearly three-quarters of its value.

Some winners in the late 1990s tech boom ultimately went bust. But just as with the Nifty Fifty in the early 1970's, the majority of America's technology bellwethers weren't bad companies. Instead, they were simply trading at unsustainable valuation levels. Unfortunately, vivid and unpleasant memories of the 2000 tech collapse have convinced some investors to be permanently leery of the group. But as this chart illustrates (see chart), valuation levels for technology stocks have fallen sharply from the exuberant heights of early 2000. The group now trades in line with the broader market on a price-to-earnings (P/E) basis -- the current P/E for the S&P 500 Tech sector stands at less than 16 times.

More importantly, the group has been handily outperforming the broader market. In the first five months of 2009 alone, the S&P 500 Technology Sector returned roughly +14% and the technology heavy Nasdaq Composite delivered nearly +8% gains while the S&P 500 simply broke even.

This superior showing is justified by the tech sector's fundamentals. Technology stocks are attractive for two basic reasons: strong growth prospects and pristine balance sheets (see chart below).

Consider that earnings for the tech-heavy Nasdaq Composite are projected to grow nearly +17.0% this year compared to a -7.2% decline for the S&P 500 as a whole. Even more impressive, the five largest technology stocks in the S&P 500 are projected to see earnings growth of +4.8% on average this fiscal year. That's a solid showing when you consider the world remains mired in a nasty recession. It's even more impressive when you consider the five largest non-tech stocks in the S&P 500 are expected to see earnings shrink by more than -15% on average this year.

And last year amid a global credit crunch, investors refocused on corporate balance sheets. Borrowing costs for even the most creditworthy firms have increased markedly in recent quarters. And companies with more shaky credit histories have been totally unable to raise debt financing at any cost.

At best, companies with heavy debt burdens can be expected to pay much higher interest rates to obtain capital needed to fund growth. And, in some cases, a heavy debt burden can be fatal -- if a company can't meet the terms of its debt covenants, bankruptcy is a very real risk. With these points in mind, companies with low debt burdens and large amounts of cash on the balance sheet deserve to trade at a significant valuation premium. These firms have no need to sell bonds or take on credit lines to expand. Even better, companies with solid cash positions have an unparalleled opportunity to take advantage of depressed market valuation levels to buy up competitors and enhance their market positions.

On this basis, the technology sector looks particularly attractive. As our chart indicates (see chart), the average technology stock in the S&P 500 has a debt-to-market capitalization ratio of just over +23%. This is by far the lowest debt-to-cap ratio for any sector in the S&P 500 and far lower than the S&P 500 average of around 50 percent. In addition, around half of all tech stocks in the S&P 500 have no net debt whatsoever.

For example, Google (Nasdaq: GOOG, $440.28) has no debt and nearly $18 billion in cash. This strong financial position gives the company the ability to make strategic acquisitions in an environment where valuation levels for many internet companies remain depressed.

My staff and I believe Google is still a solid buy for growth-oriented investors. It trades at 16 times projected earnings and has a long-term growth rate of close to +19%. It's unusual to find a market leader like GOOG trading at a discount to its long-term growth rate. I believe that Google could trade at as much as 1.5 times its long term growth rate, which would equate to a P/E of about 29 times. On that basis, the stock could trade as high as $600, a +36% increase from its current price.

Good Investing!

Paul Tracy
Editor
StreetAuthority Market Advisor

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About Paul Tracy

Paul Tracy co-founded StreetAuthority.com and became the firm's Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in 2006. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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