Alas.....
'Gold Rush' Not Over for Internet Stocks
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.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com). |
