Gene, thanks for your thoughts.
1. INTERNET STOCK OUTLOOK
by Chris Agarwal
Everyone knows or should know of a concept called a “Santa Claus” rally. The time of the year when investors have the largest amount of money to pour into investments and generally feel the most confident about equity trading is the early winter
months, especially January. Earlier this year, we saw a blistering January rally sending Internet stocks through the roof only to get stopped in their tracks by the emergence of a gloomy Asian financial crisis. This time around, the outlook is not so bad. Interest rates
have been cut several times, the Asian markets have stabilized somewhat, Iraq has been bombed, and Clinton impeached. With many earnings warnings out of the way and e-commerce at a reported all-time high this Christmas, is the stage not set for another Internet stock rally?
This past week we have seen enormous gains by Internet stocks. From day to day we saw a cyclical upwards movement of the Internet sector with an emphasis on recent IPOs and e-tailers of all sorts. From newbies like TicketmasterOnline/CitySearch, Xoom.com, and
Infospace to Ubid, Ebay, and Etrade, we have seen gains upwards of several hundred percent in reaction to no news. Even the microcap sector has become hot again with impressive gains being made by the online gaming sector.
We feel that there is still an upside for Internet stocks but that a climax top may be inevitable in the near future and that the best option for traders and investors alike is to purchase stock in companies that have yet to make large moves (large being more than 20% gains, consequently). While Ebay and Ubid have become more valuable than Excite and Lycos, don’t expect earnings to follow. There is a fine line between stock valuations and company potential. Clearly, during this holiday season, e-tailers have been given much
higher valuations than content companies. Just one month ago and for the majority of this year, however, we have seen the opposite. We see many opportunities in the various Internet sectors for short and medium term appreciation. While investing in newbies is like
gambling, why not take a stake in some companies that have been a bit stale but that have shown some support? How about SportsLine USA(SPLN), Excite(XCIT), Lycos(LCOS), PSINet(PSIX), Mindspring(MSPG), Earthlink(ELNK), or even microcaps like Starnet Communications(SNMM)? While we see Ebay deserving a high valuation because of its
brand name and Ubid deserving some of its runup because of its brand from previous successful management, we don’t think these companies will hold the valuations that America Online or Amazon.com may. In our view these run-ups are the result of a stream of positive news released before Christmas, a rash of IPOs being pushed through out the door before the new year, and the rampant reports touting online shopping as being responsible for a large percentage of present-buying this holiday.
As for the good-old Disney-Infoseek combination, we have had to think long and hard about this and finally came to the conclusion that we should remove Infoseek from our list of featured companies. Until Disney exercises their shares at $50, investors will not pay more than that amount lest they intend to sell their shares to Disney for less than they bought them for. While we still see the synergy between the two as extremely positive, there is no doubt that the beta Go Network was nowhere near our expectations and that Disney will probably not exercise their option to buy Infoseek shares any time in the near future. We expect that they may do so some time in mid to late next year but feel that between now and then there are some large gains to be made by investing and trading other stocks.
Have a great holiday everyone! We’ll talk to you again just before the new year.
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