Investors say heed the lessons of Icarus as Nortel marks 15 years after peaking
It was 15 years ago this month when Nortel Networks’ shares hit an all-time high of $124.50 on Toronto’s stock market.
The company’s sky-high stock made it by far Canada’s most valuable company at the time — with a market value that briefly surpassed any of the banks and resource companies listed on the Toronto Stock Exchange.
It didn’t last. A few months later, Nortel shares began a bumpy slide that resulted in a worthless stock and the bankruptcy breakup of what was once a global leader in telecommunications networks.
Even though Nortel is now long dead, industry veterans say that, human nature being what it is, most investors won’t learn from its boom and bust.
“I find in this business, people want to believe,’’ says Ross Healy, chairman of Strategic Analysis Corp., an investor advisory firm.
“People are mesmerized by rising stock prices. They don’t ask if this is coming to a limit. The longer it goes on, the more that they are convinced that it’s going to keep on going on.’’
He predicts that today’s highflying social media stocks will be crushed — just as other tech stocks were in the past — because investors are willing to overpay if they expect a company’s spectacular growth will continue into “the infinite future.’’
Thomas Caldwell, who has had a long involvement with the Toronto Stock Exchange as the founder of Caldwell Securities, says he thinks the next crisis will come from “the ETF world’’ — exchange-traded funds that mimic market indexes like the S&P 500.
“You may have some heavy weightings in some big companies that just aren’t going to be there some years from now,’’ Caldwell says.
Nortel’s large weighting on the Toronto market’s benchmark index — as much as 37 per cent of the entire TSE 300 index — was unusual and problematic, but not the focus of reforms going on behind the scenes during the same time period.
“Changing the TSE 300 to what became the S&P/TSX composite was a fairly long, drawn-out effort and a lot of discussion,’’ says David Blitzer, who is managing director of S&P Dow Jones Indices.
“Clearly Nortel was on everybody’s mind when it was going up ... but in my recollection they were two separate issues.’’
A security guards patrols Nortel Networks’ corporate headquarters in Toronto, Ont. on January 14, 2009.