Incubators: SFE, CMGI, RRRR etc:
nytimes.com
<<For Net's Incubators, a Market Overheating
By MICHELLE LEDER
ast year, investors couldn't lose with Internet incubators: Stocks of companies like CMGI, Internet Capital and Safeguard Scientifics climbed 5-, 10-, even 25-fold, and those who bought shares on any weakness were quickly rewarded.
Much of the attraction was the incubator business model. The companies finance Internet start-ups, provide them with managerial expertise, then push them out of the corporate nest in what have been lucrative public offerings.
Investors, in turn, get a degree of diversification, smart management and a chance to buy into fledgling Web companies at the same low prices as venture capitalists.
"This was supposed to be the thinking man's way of participating in the Internet without having to think too hard about the winners," said Steven Appledorn, a portfolio manager at Munder Capital Management, which holds positions in several incubator stocks.
But the party is over. While the Nasdaq composite has fallen 34.2 percent since March 10, the incubator stocks have taken even deeper plunges from their recent lofty levels. CMGI has lost 68 percent from its high on Jan. 3, Internet Capital is off 76TK percent from the same day, and Safeguard is off 66 percent from its high on March 17.
Lesser-known incubators like Rare Medium and Acacia Research have suffered, too -- down 84 percent and 76 percent, respectively, from their highs on March 9.
Why such punishment? Part of the problem is the optimistic assumptions that analysts built into their valuations. Many analysts, for example, would value an incubator in part by assigning a potential market value to its still-private holdings based on comparable publicly traded stocks, then perhaps double that amount to account for the synergies and management expertise provided by the incubator parent.
That, of course, did not take into account that the Internet market was overvalued, that synergies might not materialize or that management expertise might matter little.
Most important, the valuation did not account for the possibility of a cooling market in new stock issues. Such a chill may be under way, as 13 of the 84 Internet-related scheduled new issues this year through Friday have been postponed or withdrawn. Through Friday, 64 percent of new issues this year were trading below their offering prices, according to CommScan, a research firm.
"Some of these incubators are going to fall off the map just as fast as they got on the map," said Chris Selland, a vice president at the Yankee Group, a consulting firm.
One key test may come this week, as Alta Vista, the Internet portal in which CMGI has a majority stake, is expected to go public. If the deal, originally scheduled for March 6, is delayed again or fizzles, a result could be further weakness in the group, analysts said.
"If Alta Vista is not successful, it's going to put more emphasis on which stocks can survive without additional capital," said Phil Leigh, an analyst at Raymond James Financial, a brokerage firm in St. Petersburg, Fla. If the deal is a hit, he added, "it could turn sentiment, but not to the unbridled enthusiasm we saw earlier."
Leigh has a buy rating on CMGI, which now trades at $52.0625; his 52-week target is $100.
Most analysts continue to recommend the stocks. Pat D. Walravens, an analyst at Lehman Brothers, has a strong buy and $200 price target on Internet Capital, as he has for months. It now trades at $38.984375. Barry Chubrik, an analyst at Credit Suisse First Boston, started coverage of Rare Medium on March 27, rating it a strong buy with a 52-week target of $80. It is now at $14.6875.
Appledorn said he had been adding to his positions in CMGI, Safeguard and Internet Capital: "This exodus is clearly overdone.">>
Morgan |
