Money Managers Sell High-Flying Internet Stocks: Flow of Funds
New York, July 16 (Bloomberg) -- Some mutual fund managers are hedging their bets on many Internet-related stocks amid concerns that the bonanza is over for these high-flyers.
Roger Engemann & Associates sold shares of Excite Corp., Duncan-Hurst Capital Management sold Amazon.com Inc. and a Waddell & Reed fund sold America Online Inc. and Yahoo! Inc.
Shares in Internet companies, many of which have yet to post a profit, have nevertheless tied investors to a rocket-ship for much of this year. By July 6, Yahoo!, the largest Internet directory with 95 million pages of information available for viewing, more than tripled to 207 1/2. Since hitting that high, though, it has pared back to 186.
At the same time, more than 6 million Yahoo! shares out of 48 million shares outstanding, have been sold short by investors who are betting they'll fall further, and can be bought back at a lower price.
Internet stocks' recent declines are scaring off some investors. ''We won't load up on these stocks for another six months to a year,'' said Paul Cook, manager of the Munder Netnet Fund, which recently sold shares in Yahoo! and Lycos Inc., the No. 4 Internet directory. ''We don't think there's a lot of upside left in the stocks after their big run-ups.''
Some investors have no complaints about the stocks' performances, over all.
Roger Engemann, which manages $7 billion of assets in Pasadena, California, paid $22 a share for stock in Excite in December 1996, and sold 250,000 shares in the second-largest Internet directory company for an average price of $70 a share in the past month, said Ned Brines, an Engemann analyst. Excite shares subsequently rose as high as 111 on July 7 before dropping back to 91.
Defying Analysis
Professional stock-pickers say it's difficult to forecast Internet companies' prospects because the industry is only a few years old and seems to defy conventional investment analysis. ''This is a tough group to view from traditional measures,'' said Steve Ross, who manages $4 billion in customers' assets at Nicholas Applegate Capital Management in San Diego, which has $30 billion in assets. ''It's not easy to know about earnings and how big the business will be down the road.''
Popular ways that these companies can make money include selling products on a web site, attracting viewers to a site in the hope of selling advertising to them and providing such services to other Internet companies as tracking the number of ''hits'' on a web site. Amazon.com Inc., for example, makes available 2.5 million book titles on the Internet.
Many Internet stocks reached their highs on July 7 before falling back. Amazon hit 143 3/4 and is now at 113 5/8. Its short interest has reached more than 7.5 million shares, or 15 percent of its outstanding shares. Doubleclick Inc., an Internet service company, went to 77 1/8 and is now trading at 48 1/4. Excite reached 111 before dropping to 94 1/2. ''You've seen these stocks cooling off lately -- and rightfully so -- since they've doubled in a month but haven't increased their sales, revenues and earnings in a month,'' said Ross of Nicholas-Applegate.
Too Far, Too Fast ''The shares of many Internet companies had gone up too much lately,'' said Abel Garcia, who manages Waddell & Reed's United Science and Technology Fund and sold off 275,000 shares of America Online and 50,000 shares of Yahoo! earlier this year. Waddell & Reed manages $27 billion in customers' assets.
The selling of some Internet stocks by mutual funds followed a period in which individual investors played a big part in driving up the prices of the shares. ''There was a buying frenzy in these stocks that was getting irrational,'' said Patrick Adams, fund manager at Berger Associates in Denver, who owns no Internet stocks. ''The speculative fever came largely from retail brokerage customers, which makes me nervous because they often buy fads.''
Some investors saw the Internet rally as an opportunity to walk away with huge profits. Fund managers took notice. ''We trimmed back on Yahoo and took some of it off the table,'' said Ross, whose fund owns $30 million worth of shares in Yahoo and $15 million in America Online Inc.
Garcia, who manages $1.5 billion, said he had purchased 1 million AOL shares ''at an average price of under $10 a share, on a pre-split basis.''
Small funds have acted, too. The $37 million Munder Netnet Fund, of Birmingham, Michigan-based Munder Capital Management, cut stakes in Internet directories Yahoo! and Lycos in the past few weeks. At the time, each stock represented about 3.5 percent of the fund and now each consists of 1.5 percent of it. ''We started selling the shares three weeks ago because we didn't see much upside left after their huge run-ups,'' said Paul Cook, manager of the Munder fund.
Healthy Balancing
In some cases, Internet stocks appreciated so much that managers had to sell shares to maintain a healthy balance in the fund.
Duncan Hurst, based in San Diego, sold more than 50,000 shares of Amazon.com and 25,000 shares in Yahoo partly because the stocks had climbed so quickly that it suddenly comprised 7 percent of the fund. ''When we started the investment, it made up 3 percent of the fund, and we don't want to have more than 5 percent of any one stock,'' said Stephen McNally, a fund manager at Duncan Hurst.
Investors have snapped up Internet stocks on expectations that these equities can enrich them in the fashion of oil or computer shares.
Major media companies have noticed the potential riches of the Internet.
On July 9, General Electric Co.'s NBC television network said it completed an acquisition of CNET Inc., an Internet content network, for $26.2 million. On June 18, Walt Disney Co. agreed to buy 43 percent of Infoseek Corp., the third most- popular Internet search directory.
Still, investors remain cautious as they navigate uncharted waters of Internet stocks. ''It doesn't matter how much experience you've had, either, because nobody knows what to expect,'' Ross said.
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