Barb,
Here's a few things from the Barron's article.
- Mentioned recent run-up and Friday's action (XCIT down $15+!!)
- Mentioned how K-Tel is now part of tulipville.
- Here's a snip from the article with the good stuff:
Merrill Lynch last week picked up coverage of the four main players in the Internet navigation business -- Yahoo!, Excite, Infoseek and Lycos -- with positive comments that added some fuel to the Internet fire. Jonathan Cohen, who joined Merrill a few weeks ago from UBS, issued "3-1" ratings on Yahoo!, Excite and Infoseek, and a "2-1" rating on Lycos. In Merrill-speak, a "3-1" means neutral short-term, buy long-term. The slightly more bullish "2-1" translates to accumulate short-term, buy long-term. Cohen unveiled his first Merrill-paid writings on the stocks Tuesday morning. By the time the stocks closed for the day Tuesday afternoon, Excite had gained 7 1/8 to 76, Infoseek had improved 4 1/16 to 25 5/8, Lycos had ticked up 3 1/8 to 68 5/8 and Yahoo! had advanced 1 7/8 to 114 7/8. Not a bad day's work: In one trading session, the market cap of those four stocks combined had increased by $370 million. And the stocks had even bigger days on Wednesday and Thursday.
The interesting thing is, anyone moderately familiar with Cohen's work could have figured out what was coming. At UBS, where they use a similar rating system, but without the short-term, long-term feature, Cohen had neutral ratings on Yahoo!, Excite and Infoseek, and an accumulate rating on Lycos. His views didn't change; his employer changed. Nonetheless, the Street seemed relieved that Cohen, an independent sort who has been known to issue the odd sell recommendation on occasion, took a generally sunny stance on the stocks. So they all moved higher. Hmmm. Makes you wonder what else Cohen liked at UBS, doesn't it? Well, for one thing, he showed particular enthusiasm for America On-line, which at the moment is covered at Merrill Lynch by another analyst, who has the stock rated "3-1." Whether Cohen might take over AOL coverage, he declines to say. Cohen advises investors daring enough to try to value Internet stocks to throw out trendy measures like "page views" and "hits" and focus instead on revenues. After all, he notes, what matters is not just attracting eyeballs, but "the ability to monetize those traffic streams." At the moment, he notes, the four players in the search-engine group trade at between 10 and 40 times forward revenues. Cohen sees those valuations as a vote of confidence that over the long term, the companies can generate significant growth, and high-margin profitability. Imagine what will happen if they can't pull it off.
Several more quick examples of the current Internet mentality. Infoseek on Wednesday morning announced an agreement to acquire WebChat Broadcasting System, a "community site" featuring chat rooms and free home pages, for about 350,000 Infoseek shares, or about $6.7 million in Infoseek stock. By the close of trading Wednesday, Infoseek shares had gained 8 7/8 to 34 1/2. That increased the company's market cap by more than $240 million. On Thursday, the market cap rose another $264 million. They should do one of those deals every morning.
The same method works for small companies. ICC Technologies, a Hatboro, Pennsylvania, company that makes humidity-control systems, on
Wednesday said it will buy Rare Medium Inc., a Web site development company, for $45 million in cash, stock and notes. ICC shares then soared 70%. On Friday, a little Internet services firm called HomeCom Communications announced a deal to buy an Internet Web hosting firm called Insurance Resource Center. HomeCom's stock doubled Friday.
Michael Murphy, the newsletter writer and fund manager, has just crawled out onto a long limb. In big, bold type on the front page of the April issue of his monthly Overpriced Stock Service newsletter, there's a headline advising investors to -- you guessed it -- "Short The Internet." And he's talking about the sector's biggest names. Like Amazon.com. On-line book sales, he contends, will be "a cutthroat business with razor-thin margins." He's also short Lycos, which he believes will get crowded out by larger competitors.
"If they were a division of a Silicon Valley company they would be shut down as an also-ran not worth investing in," he writes. "As a Massachusetts company they get a billion-dollar market capitalization." Also on his hit list: OnSale. While the on-line auction site continues to build revenues, he notes, losses have been accelerating.
Murphy also advises shorting Infoseek, noting the company is "losing even more money per share than Lycos." He's short Excite, too. And in perhaps his boldest pronouncement, Murphy advises shorting Yahoo!. He contends advertising on Yahoo! doesn't accomplish very much. "Their effectiveness rate is near zero; that is, quality buyers are not being delivered to the advertisers," Murphy writes. "In a great media year like 1997 everyone makes money. Media budgets are high and there is cash to experiment with new outlets like the Internet. As the U.S. economy slows, advertising budgets get cut back and guess who gets cut first? You got it. Folks who cannot demonstrate cost-effective impact that sells products and services."
The newsletter's list of "potential prey" includes an array of other Internet companies, including CDNow, Doubleclick, Go2Net, Network Solutions, Sportsline and VeriSign.
More than a few smart hedge-fund managers have been wounded in recent months trying to short these very stocks, so if you choose to take Murphy's advice, move cautiously. Last week's huge moves demonstrate the danger of being on the wrong side of one of these stocks. As noted in last week's Trader column, some institutions have been buying baskets of Internet stocks, bidding up prices seeking exposure, without paying a lot of attention to fundamentals. Until that changes, shorting Internet stocks will remain a highly dangerous activity.
{There was more to the article, but I've already violated the copywrite enough.} |
