Internet Stocks Get Boost From Pessimists: U.S. Stocks Outlook.
New York, July 19 (Bloomberg) -- Internet mania is driving investors who bet against the stocks crazy.
So-called ''short-sellers'' -- investors who borrowed shares of companies such as Yahoo! Inc. and America Online Inc., speculating the stocks would fall, letting them repay the loan with far cheaper shares -- got caught in a ''short squeeze'' during the past few months, as the shares defied expectations by doubling and tripling in value.
The surge forced the short-sellers to buy shares at higher and higher prices, driving up the shares even more. ''Half of what's (fueled the rally) is that guys who were shorting the stocks were forced to cover,'' said Andrew Abrams, a money manager at CWH Associates Inc. in New York, which manages $90 million.
An investor who sold 10,000 shares of Yahoo! short in early June could have been as much as $1 million in the hole, if he were unfortunate enough to stick with his bet as the stock ran up to 207 from 102. Anyone who bet against America Online this year got killed, as the stock almost tripled to 128 from 45 1/4 at the end of 1997. ''There's no question that some short-sellers have gotten caught,'' said Dave Jones, an analyst at Overpriced Stock Service, a Half Moon Bay, California-based monthly newsletter on short selling.
Some short-sellers have given up. The latest statistics show that short positions in some marquee Internet stocks fell in June. Some 1.83 million shares of Excite Inc. were ''short'' in mid-June, down 30 percent from May. Lycos Inc.'s short position fell 15 percent to 1.84 million shares, and America Online shares sold short fell 7 percent to 3.72 million.
They may have exited too soon. Since July 6, Excite Inc. is down 17 percent, and Lycos is down 30 percent. America Online, though, reached a record Friday.
Optimists
Of course, optimists account for part of the rise. Some investors say they're buying the stocks because the Internet will be as groundbreaking to communications between people and businesses in the next century as the expansion of railroads was to those living 150 years ago and the telephone was to people in 1900.
Friday, shares of Broadcast.com Inc., a broadcaster of sports, news and music over the Internet, tripled in their first day of trading. The biggest shareholder, 39-year-old co-founder Mark Cuban, saw the value of his stake shoot to $295 million.
Inktomi Corp., a maker of software designed to reduce congestion on the information superhighway, has almost quadrupled since its initial public offering on June 9. ''My working assumption is that the Internet will represent a big change to everyone and every company,'' said Grant Sarris, co-manager of the Waddell & Reed Growth Fund, which has about $360 million. The firm currently owns shares of Yahoo. ''But if you start looking at market caps relative to size of the business (currently), things have to go right for a sustained period of time to justify'' prices where they are.
A Typical Mania ''This is like all other manias: There will be a lot of failures and lot of people hurt, and a lot of money made,'' said Mort Cohen, managing partner at Clarion Partners LP, a money- management firm based in Cleveland that has about $70 million in assets.
He's also short N2K Inc., which sells music over the Internet. ''Margins in the record business are at a minimum, and Amazon.com is now selling CDs.''
Cohen didn't say how long he has been short the stock, but that may be one short bet that paid off. N2K has declined 38 percent since mid-April.
Cohen isn't betting against all Internet stocks. He owns CMG Information Services Inc., a collection of Internet-related businesses under one roof, whose shares have more than doubled since early June.
More Earnings Reports
Internet stocks won't be the only ones in the spotlight in the days ahead. Investors will be inundated from all corners of the market by another wave of corporate-profit reports. Should the trend of strong results continue, stocks may rise to records.
Among the companies slated to report this week are AT&T Corp., Sears, Roebuck & Co., Walt Disney Co., International Business Machines Corp., Philip Morris Cos., Boeing Co. and BellSouth Corp.
The Dow Jones Industrial Average gained 2.6 percent in the week. The Nasdaq Composite Index jumped 3.4 percent, and on Thursday crossed the 2000-point level for the first time. The Standard & Poor's 500 Index climbed 1.9 percent. ''The earnings numbers are coming in pretty much as expected,'' said Garrett Nagle of Garrett Nagle & Co., a Boston- based firm with about $250 million in assets. ''The flow of money into mutual funds is great, earnings are OK and interest rates are pretty comfortable.''
For large companies that have reported quarterly earnings so far, profits rose just 1.1 percent from a year earlier, according to IBES International Inc. Yet when results from General Motors Corp., Intel Corp., Motorola Inc. and Compaq Computer Corp. are excluded, earnings rose 10.2 percent, IBES said.
Nagle recently bought shares of HBO & Co., the largest maker of health-care company software. The stock fell 20 percent in the first four days of last week, partly because McKesson Corp. said it failed to reach a merger agreement with HBO. ''The market looks at things on a day-to-day basis at times, not for the long run,'' he said. The company's strong business should enable its stock to rebound eventually, Nagle said.
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