THE NET'S NEXT ERA: Don't Get Bubbly over Net Stocks' Bounce
NOVEMBER 14, 2001
By Amey Stone
Even though dot-com shares have jumped recently, investors need to pick and choose carefully now more than ever
You can hardly blame investors for devoting scant attention to the Internet sector these days when Web businesses are still folding one after another. So what should you make of how well the group has done in the past six weeks? A broad-based index of Internet stocks developed by technology strategist and author Peter Cohan has more than doubled since the market low on Sept. 21, compared with the Dow's increase of about 20% and the Nasdaq's 35% jump.
One conclusion to draw is that even stocks that seem near death can jump pretty high in percentage terms if they go into remission. When a former high-flyer such as CMGI (CMGI ) is trading at 60 cents, it doesn't take many buyers to nearly quadruple it to $2.40.
Also remember that it's sometimes hard to distinguish between stocks that are rebounding and plain old market gyrations. "I think after September 11, volatility has been kicked up a notch," says Ryan Jacob, portfolio manager of the Jacob Internet Fund (JAMFX ), which is down 61% this year despite recent gains.
ROCKY PERIOD. Jacob worries that macroeconomic forces and developments in the war on terrorism could "trump" a recovery in the technology markets practically at any moment. "You have to be a realist," he notes. "We're dealing with an uncertain environment." Jacob says he's optimistic over a 9-to-12-month time frame but thinks that the next three to six months could be rocky for dot-com stocks.
Indeed, a look at the increasingly sparse dot-com landscape reveals few clear investing opportunities. Of the hundreds of companies that went public in 1999 with soaring stock prices and lofty goals, analysts agree that only one has lived up to its promise -- auction king eBay (EBAY ).
Now at $59, eBay has continued its impressive growth despite the weak economy. WR Hambrecht analyst Derek Brown has raised his 2002 sales estimates for eBay twice in the past month following company briefings and has a strong buy rating and a $75 price target on it. Still, many analysts think its shares are already too high. "Even the toughest critics would agree it's a phenomenal business," says Jacob. "But it's probably over-owned right now."
PRICEY BIGGIES. America Online has survived the meltdown, too -- partly because its merger with Time Warner last year left it only partly an Internet company. Don Luskin, chief investment officer of investment advisers Trend Macrolytics, says AOL is the only Internet name he has in his portfolio. "They're in a position to try to combine online and offline media properties," he says. "No one else is doing that at anywhere near their scale, and I think there's a lot of value that can be exploited."
Many of the remaining dot-com biggies seem overly expensive, with their growth stalled and future prospects cloudy. Yahoo! (YHOO ) is now at $14 as it flounders in a tough Net-advertising environment. Amazon (AMZN ) is stuck at a mere $7 and continues to face steep competition online. Plus, it could take a hit if the holiday shopping season is slow. "Any number of stocks will likely survive -- but few of them are worth investing in at these valuations," says Paul Shread, a stock analyst at Internet.com. "In general, I think the market has more downside potential than upside at these levels."
The Web companies that do best when the economy rebounds should be those with business models that take full advantage of the digital medium. For instance, Shread calls online financial-services company E*Trade (ET ) an "inexpensive survivor" because at $9 a share, it trades at a reasonable 1.5 times both its sales and book value. The company has wisely diversified away from pure online stock peddling into banking and credit-card services, which allowed it to eke out an operating profit for its third quarter (analysts were expecting it to break even).
CASH CUSHION. Priceline (PCLN ), which seemed near death earlier this year after expanding beyond the travel industry, has pared back and is profitable, notes Cohan. The company topped analysts' estimates when it reported third-quarter earnings on Nov. 1 but still trades at only $4.50 a share. Cohan thinks its business -- selling cut-rate airline tickets -- may benefit from the bad economy: "In a recession, people are looking for the best deals."
Speaking of deals, some dot-coms have been so beaten down that their market capitalization is lower than the cash they have on their balance sheet, says Jacob. Since that cash should provide a cushion if the broader market weakens, he's adding to his holdings in such stocks, including Internet advertising leader DoubleClick (DCLK ), optical networker ONI Systems (ONIS ), wireless-software play Aether Systems (AETH ), and women's media company iVillage (IVIL ). "The way we're approaching the sector is to stay more liquid and be more nimble and opportunistic than we have been in the past," Jacob adds.
Investors are also interested in Web businesses that may benefit from such corporate moves as cutting back on travel and eliminating paper (now considered a tool for bioterrorism). Jacob has added Network Associates (NETA ), which makes antivirus software and video-conferencing outfit WebEx Communications (WEBX ) to his portfolio. Cohan thinks business software provider Ariba (ARBA ) will benefit from the new environment because its systems allow for paperless transactions, which also save companies money, compared with typing and faxing orders.
A SERIOUS LESSON. Still, long-term investors should be wary of jumping into stocks that seem overly tied to current events. Make sure there's a solid business behind what seems a timely strategy, warns Cohan, whose book, e-Stocks, outlines how to use the Internet to dig into company financials. "If there's any lesson we learned from the Internet bubble, it's that you can't invest in this sector indiscriminately," he says.
Given the combination of slower economic growth, valuations that may still be too high, and the potential for yet more troubling news that could rock the markets, putting extra time into researching what you buy sounds like a smart plan.
--------------------------------------------------------------------------------
Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column
Copyright 2000-2001, by The McGraw-Hill Companies Inc. All rights reserved.
businessweek.com:/print/technology/content/nov2001/tc20011114_2155.htm?mainwindow
Used with permission of businessweek.com |
