Has Santa gone loony?
By Peter D. Henig
Red Herring Online
December 23, 1998
Has the Internet Santa gone completely bonkers?
A late fourth quarter "Santa Claus rally" has taken the market by storm, racking up record gains on the Dow and Nasdaq and giving investors a warm and fuzzy feeling as we head into the new year.
Yet, even by this year's standards, recent gains in Internet stocks are wackier than usual.
Take a look at uBid (UBID), the online auction site that recently went public. Its stock has risen (to put it mildly) from $40 to $188 in just four trading days; it went up $53.50, or almost 40 percent, on Wednesday alone.
Then there's Ticketmaster-CitySearch Online (TMCS), up 32 points, or 66 percent, on Wednesday to $80.50, after having traded quietly around the low 30s since its IPO.
Or the latest and greatest of Internet scorchers, Zapata (ZAP) and Multiple Zones International (MZON), which have each doubled or more on announcements of new Internet initiatives. For reopening its Net plans, Zapata was rewarded with a gain of $7.06, or 98 percent, to reach $14.25 on Wednesday. Multiple Zones capped the zaniness with a run of 44.56 points to reach $56 per share -- an incredible 389 percent gain -- merely on investor knee-jerk reactions to news that the computing products direct marketer would be launching an auction site, auctions.zones.com, for swapping brand-name computer products.
This is silly
"At the end of the year you do have stranger activity than usual," says Ryan Jacob, portfolio manager with The Internet Fund. "But the market still has the Net bug ... anything Internet goes."
Not that Mr. Jacob minds. His fund is within striking distance of 200 percent gains for the year with just four trading days left to go.
In fact, all of the indexes are reveling in the Christmas cheer -- dubbed the Santa Claus rally -- as the S&P 500 index closed at another record high, 1228.54, and the Nasdaq set a record high for the second day in a row at 2172.54, up 24.97.
"This is the silliest thing in the world," says Rick Berry, director of research with J.P. Turner & Co. "There's as much credibility in the Santa Claus rally as there is in the Super Bowl rally ... and if you don't believe me, I've got some swamp land to sell you."
Although Mr. Berry sounds remarkably like the Grinch, he does have a point. Internet stocks have been on an unceasing tear ever since a CIBC Oppenheimer analyst put out a $400 price target on Amazon.com (AMZN), with the sector recording gains that even Wall Street analysts are at a loss to explain.
"Any attempt at offering a reasonable explanation for the action in these stocks is a futile exercise," Keith Benjamin, Internet analyst with BancBoston Robertson Stephens, said just last week.
Bull riding
But not everyone is as bearish or perplexed.
Al Goldman, chief market strategist with A.G. Edwards, is comfortable with this end-of-season sleigh ride, chalking it up as much to simple good cheer as it is to fresh 401K money being invested.
"They call it the Santa Claus rally because classically this is the best time of the year for the market," says Mr. Goldman. He draws a distinction between this boost in stocks and the bullish tendencies of the upcoming "January effect," whereby stocks which have been hard hit by tax loss selling often find a nice rebound at the beginning of the new year.
"We're in a bull market and we've got good momentum. ... I'm not surprised by this at all," says Mr. Goldman, although even he has to admit that Internet stocks have gone a bit nuts. "Internet stocks aren't just a little crazy; they are a lot crazy."
Pop the bubble
So where to from here? Can the Internet stocks fairy tale continue unabated?
While Mr. Goldman remains bullish on the market, stating that the Dow will likely reach 10,500 in 1999, Mr. Berry will have none of that.
"This is what tops are made of," says the research director, adding that factors such as outlandish price targets on Amazon, Zapata's rethinking of its Internet strategy, and feature upon feature about Internet stocks piling up in the business press are all indications that the mania is reaching its peak.
"I can't tell you when, but Internet stocks will implode," agrees David Menlow, president of the IPO Financial Network. "And when they do, it will be pure carnage."
So much for the holiday spirit.
RELATED LINKS
The market has been saying Merry Christmas to Internet stockholders all week.
Our IPO 100 index benefited from Internet fever.
The January effect should help small-cap stocks the most.
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