'Gold Rush' Not Over for Internet Stocks
Saturday September 16, 7:11 am Eastern Time
By Pierre Belec
NEW YORK (Reuters) - The bone-crushing drop
suffered by a lot of Internet stocks this spring is no
reason to write off the dot-coms, says one Wall
Streeter. The reason: The 'Gold Rush' is not over for them.
The pounding that destroyed many Internet stocks was actually healthy, analysts
say, because it eliminated dot-coms that didn't have a leg to stand on.
There were lots of winners in the first wave of the dot-coms' incredible growth.
The goal in that phase was to capture millions of customers.
The winners were America Online Inc., Yahoo!, Amazon.com, Priceline.com Inc.
and e-Bay Inc. What was impressive about the survivors was that they managed
to become household names in a couple of years, not the 10 to 20 years it usually
takes to become part of the cultural vocabulary.
Big profits will be had in the next part of the race, in businesses that create the
things that make the Internet run, said Jim Houlton, portfolio manager for Strong
Internet Fund (Nasdaq:SNETX - news).
``The winners will be the new blue-chip companies of technology,'' he said.
``We're still in the 'Gold Rush' days as far as the Internet is concerned and the
money will now be in the providers of Internet products and services.''
Strong Internet Fund's recipe has worked nicely. The mutual fund has grown its
assets to $100 million from just $1 million on the first day of trading in January
this year, according to Houlton. The fund, a unit of Strong Capital Management,
based in Wisconsin, is up 7 percent so far this year.
Houlton's pick of winners include Cisco Systems Inc., Juniper Networks Inc.,
Sycamore Networks and Inktomi Corp. Also, Ariba Inc. and Verisign Inc.
While many dot-coms have crashed and burned, Houlton said the Strong Internet
Fund has surged because it doesn't bet on concept stocks. Instead it focuses on
suppliers that grease the Net's wheels.
Most Net firms may have great concepts but great ideas are a dime a dozen. Their
business models can disappear overnight after the new kid on the block comes up
with the next brainstorm.
So the Wall Street smarties say play it safe and they recommend buying into
suppliers of systems that make dot-com companies work.
THE NEXT GREAT OPPORTUNITIES
The flood of information that is being crammed into the Net has led to bottlenecks
and there are big payoffs for companies that make stuff that can free up the traffic
jams, Houlton said. Also, billions of dollars are being spent by companies to build
out their sites to reach to their customers and employees.
The list of people online keeps getting longer. The number of U.S. online
households shot up 42 percent last year to 40.5 million, according to Veronis
Suhler, a merchant bank that specializes in media industries. Spending on
Internet-related stuff jumped 52 percent to $9.4 billion.
By 2004, Veronis estimates, 67.1 million American households will be plugged
into the Net and spending will increase 9.2 percent to $14.6 billion. Advertising on
the Internet soared from just $1.9 billion in 1998 to $4.6 billion last year.
One of the fastest growing areas is business-to-business or B2B, which is bringing
together buyers and sellers with specific common interests. Just this week, the
Federal Trade Commission approved a humongous online venture that would let
five of the biggest carmakers -- including General Motors Corp., Ford Motor Co.
and DaimlerChrysler A.G. -- buy $300 billion in parts each year.
Even powerhouses such as America Online and Yahoo! are jumping on the
bandwagon and setting up e-commerce sites for industries.
But it's been a lean year for investors trying to make money from picking the right
Internet stocks after a lot of them imploded in the spring with some freefalling
more than 50 percent between April and May.
The Nasdaq composite index, which is laced with technology stocks, is still
struggling. Part of the problem is that it often takes a market a long time to rebuild
itself up after undergoing the type of shakeout that the Nasdaq experienced.
Nine months into the year 2000, the Nasdaq is off 3
percent. At the same time in 1999, it was up an impressive 25 percent and finished
the year with an incredible 86 percent gain, the biggest annual increase ever
recorded by a U.S. stock market, thanks to the Internet.
WHAT WENT WRONG?
``In May, the fat was in the fire as our warning against holding Nets on margin led
the reckless toward dreaded margin calls,'' says James Dines, publisher of the
Dines Letter, and one of the original Internet gurus. ``It was precisely April's wild
bullishness and entry of day-trader gamblers into the arena that was the tip-off to
the selloff.''
The shakeout in the spring wrecked a bunch of the new companies, which only
had a flimsy business plan. As a result, investors who got burned badly haven't
gotten over the market-stress, and this has made it tough for the dot-coms to stay
in business.
Companies that were relying on their inflated stocks to pay for the high life, were
forced to go on a crash diet. A lot of them found it impossible to stay in business
and rolled over and died.
The dot-coms had managed to stay in business because investors fantasized about
becoming rich from owning these stocks. And their infatuation for anything with a
``.com'' had encouraged the start-ups to feed the greedy investors with even more
stocks.
After the bubble burst, many dot-coms whose stocks traded at a mind-boggling
2000 times future earnings, despite their lack of prospect for earning a dime, were
pushed into bankruptcy or were sold at fire-sale prices.
In today's difficult money making environment, the average investor recognizes
the risk of owning these tech stocks is greater than the risk of being out of the
sector.
The flood of cash from venture capitalists also dried up during the meltdown.
Now, venture capitalists think twice before jumping on board some of the 'New
Economy' companies.
Meanwhile, pink slips are still being handed out at warp speed by dot-coms.
Job cuts by dot-coms leaped 55 percent in August from a month earlier, according
to Challenger, Gray & Christmas Inc., an international outplacement firm. In
August, 4,193 jobs were lost compared with 7,592 in July. Since December, 169
companies handed out 11,785 walking papers.
The biggest cuts were among dot-coms that specialize in retailing, with the total
standing at 3,562 since December.
DON'T CRY FOR ME...
``Even though many companies are closing or downsizing, there are plenty of
others that are growing, particularly traditional companies that are moving onto the
Internet,'' said John Challenger, chief executive officer of CG&C.
``As a result, there is still an extraordinary demand for people who can build Web
sites, create online marketing programs and develop Web-site content,'' he said.
Challenger said a fired dot-com worker can be an asset.
``Workers are even more hirable after having worked in a firm that struggled or
did not make it,'' he said. ``Prospective employers see it as a valuable learning
experience.''
For the week, the Dow Jones industrial average was off 293.65 points at
10,927.00. The Nasdaq composite index fell 143.37 to 3,835.04 and the Standard
& Poor's 500 index was off 28.71 at 1,465.79.
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