William, do you subscribe to the Dines news letter? Why doesn't he mention eBay?
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NEW YORK (Reuters) - Here's an investment strategy that would keep Federal Reserve Chairman Alan Greenspan tossing and turning at night: 10 percent gold and the rest in Internet stocks.
Sounds crazy? Yes. But this is a Brave New World and people's ideas of investing for their old age are indeed revolutionary.
James Dines, publisher of the Dines Letter, is crazy about Internet stocks.
"This is the real thing," he said. "My vision has been of tremendous bullishness on the Internet, which is where the fortunes are going to be made," said Dines, an original "Internet bug."
Dines does not think the Internet sector is a giant bubble ready to burst, even though some stocks have soared more than 1,000 percent at the blink of an eye.
"The technology is the future and it's starting to branch out to Latin America, China -- and the growth is going to be unbelievable ... the ability of the entire world to communicate instantaneously, practically free, has a potential that frankly blew our minds," he said.
Dines believes the Internet will eventually take some of the play away from the nation's biggest blue-chip companies.
The problem with the skeptics is that some people can't see the future because they are trying to evaluate the Internet in terms of what happened in the last 100 years, he said.
But some Wall Streeters worry that investors may be going overboard on the fast-paced industry, and there is a risk that a crash climate could be forming.
Fed chief Greenspan has warned that investors may be foolishly bullish about stocks, and that a sudden market reversal could destroy a lot of the wealth that has produced annual double-digit market gains for almost five years.
One market strategist thinks that the Internet is just a fat speculative bubble that is just waiting to blow up and drag the rest of the market into the dumpster.
Raymond DeVoe Jr., market strategist for Legg Mason Wood Walker, sees classic signs of trouble in the high-flying Internet sector. He says Internet stocks that have recently been offered to the public should be renamed "Crash.Com."
"Bear markets begin at the point of maximum optimism," he said. "For the Internet stocks, the maximum bullishness occurred in April or early May, when they made their highs as America Online <AOL.N> reached $175 and Amazon.com <AMZN.O> $221.
"Sure, the stocks could rebound from here and go even higher since overvalued stocks can become even more overvalued," he said.
"But the point where the bullish cycle ends will only be apparent in retrospect, when investors ask themselves 'What could I possibly have been thinking?'
"The eye opener for me was MP3.Com (MPPP.O) that went public last week at $28 a share, started trading in the 90s, then hit 105 and has since gone back down to the 50s," DeVoe said.
"What was outrageous was that at one point the company, which is just 16 months old and has no proprietary products, was worth $6 billion and all it does is allows people to download music for free off of the Internet," he said.
DeVoe said that investors' tremendous optimism has also spread to the rest of the stock market, with the overall price/earnings ratio at a record 35.
"In a bull market, there are several stages," he said. "It starts with contempt for stocks. Then guarded optimism. Then enthusiasm, exuberance and unreality."
DeVoe said the start of the current bull market was on Aug. 12, 1982, when the Dow Jones industrial average was at 776 and stock prices were just eight times earnings.
"If that multiple were applied the same way now -- the Dow selling at eight times earnings -- it would be at 2,600," he said. On Friday, the Dow was just a little over 200 points shy of the 11,000 level.
Indeed, some of the excitement may have gone out of the Internet sector, at least in stocks that recently made their debut on Wall Street.
According to Thomson Financial Securities Data, the average first-day gain of Internet IPOs that came out between January and April was 143 percent. But since then, investors have given the cold shoulder to some of the newcomers, with their average gains at a less impressive 66 percent.
Also, the gains of the Internet IPOs since they came to market have also shrunk. Stocks that were offered between January and April are still up an impressive 92 percent while those that were offered since May are up 77 percent.
Would a major selloff in the popular Internet stocks bring down the entire market?
History shows that the undoing of manias often has sent shockwaves through the entire market.
The most dramatic domino effect was in 1962, when science or technology stocks soared due to the enthusiasm in space exploration that was created after President John F. Kennedy pledged to put men on the moon within the decade.
What followed was a headlong plunge of up to 50 percent for some tech stocks that spread to the rest of the market. The Dow went through a then eye-popping drop from a high of 727 to 535.
"A lot of investors were badly mauled," DeVoe said. "What happened was that people had to raise cash and they couldn't do it because of the illiquidity in the freefalling overvalued stocks, and so they sold the GEs and GMs where there was still a market."
Dines disagrees. The market will keep on ticking, even if the Internets drop sharply, he says.
"Internet stocks have had big drops all the way up and it would have a minimal impact on the overall market," he said.
"This is still 'The Mother of all Bull Markets' and even with the sharp selloffs we've had in the past in Internet stocks, the Dow is still only 1,000 points from its record high," Dines said.
The market may have been able to stand up to the recent correction in Internets because a lot of the general public is not actively trading Internets.
"The older investors are not into Internet stocks ... they're terrified of them," said the 40-year veteran investment advisor, who says he caught the Internet bug in 1994.
"The mutual funds, overall, are also not in Internet shares and they have been frightened all the way up because they don't see earnings and book value for these companies, " Dines said. "Earnings and book values may work OK for the U.S. Steels but it does not work for America Online."
How can the Internet companies justify their extraordinarily high stock prices in view of their flat or negative balance sheets?
"The truth is that they are new companies in brand new fields that are carving out new niches and people are racing to buy them because they just don't know which companies will flower in the next few years," he said.
Dines said the best Internet investment strategy would be a basket of stocks.
"My first four recommendations years ago were CMGI <CMGI.O>, Yahoo! <YHOO.O>, , Amazon.com and AOL, and they were four of the biggest winners in history," he said.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com). <<
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