Thanks, N.Wayne. From the "WSJ": Rated "NC17"
Heard on the Street
Pros Find Some Good Bets
Among Hot Internet Stocks
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
Maybe you're not a rapid-fire "day trader." Maybe you've never even been online. But you've still got the itch to buy an Internet stock.
You're in good company.
Some of Wall Street's biggest guns have only recently begun in earnest to lay their Internet bets, after good results in the past couple of weeks from Internet leaders Yahoo!, Amazon.com and America Online and a mild correction in the group convinced investment pros that it's not too late to join the party.
But sorting through the dozens of dot.com stocks isn't easy. After all, risk takes on a whole new meaning when it comes to Internet stocks, which have soared to unbelievable heights in recent months, with the prices of some jumping sevenfold in the past several weeks alone. All the while the experts, including the chief of the Securities and Exchange Commission last week, have warned that the Internet bubble may burst at any moment.
No Safety Nets
Risk outlook for Internet stocks that institutional investors consider worth a look:
Medium risk
Yahoo!
America Online
Amazon.com
eBay
High Risk
Lycos
broadcast.com
At Home
DoubleClick
Higher Risk
Exodus
CMGI
TeleBank
Concentric Network
Source: WSJ research
Is it possible to sleep at night and own Internet stocks?
Yes, say the experts, but it helps to have a strong stomach. Every Internet stock represents huge risks. Some are a little like playing Russian roulette with just one chamber empty. Even after the recent correction, some bullish analysts are warning that there could even be a 80% drop.
"Yes, it hurts to buy Internet stocks because they are so expensive," says Henry Blodget, an analyst with CIBC Oppenheimer, one of the Internet's biggest bulls, who nevertheless has been sounding cautious notes lately. "Maybe we'll all wake up a year from now and wonder what we've done. But you could also be buying into a company at a very early stage. And that's what I think is going on. The price appreciation is crazy but the urge to invest is not," he says.
You don't have to be a gun-slinging day trader to devote, say, 5% of a stock portfolio to Internet plays, analysts say. But how to separate the real crapshoots from the more calculated risks?
Part of the trouble is that regular yardsticks don't help much. You won't get far using a price-to-earnings ratio to measure the risk in Amazon.com's stock price, for instance, since it hasn't yet had a profitable quarter.
Price-to-revenue is a better measure, but all price-to-sales ratios aren't created equal in the Internet world. Amazon's revenue increases aren't as meaningful on Wall Street as Yahoo's, for instance, since the bookseller's margins are, well, skimpy at best.
But number-crunching isn't really the point with Internet stocks. Most of the pros say they've swallowed hard on their Internet picks and gone with their instincts. "This is the fastest-growing medium in the history of the planet," says mutual-fund manager Barry Mills, with Phoenix Strategic Theme Fund. "We know only 1% of what e-commerce will look like 10 years from now. It's a little like driving in a complete fog. You know you can drive fast. But you don't know what will come at you."
For the timid, the surest place to start is with shares of companies that have laid a claim on a particular piece of the Internet, including America Online, Yahoo, Amazon.com and eBay.
"Those are the guys I can see getting customers, keeping them, rapidly growing revenues and building brands. I see brands working and non-brands failing," says Mr. Mills.
The theory, even at this stage in the game of Internet investing, is that the Internet blue chips may have a somewhat smaller drop if the Internet bubble bursts. "I think you buy the big names first and buy quality, not price," says Oppenheimer's Mr. Blodget. "If the group goes down 75%," he says, "the top-tier players may go down only 50%."
The bad news is the top-tier players' biggest run-ups in price may be behind them. But they also stand a better chance of being around five years from now. Indeed, that's what happened with biotechology stocks in 1992 when the bottom fell out. Amgen survived a one-month 50% drop in its share price. Smaller players, whose stocks fell even further, crashed and burned.
In the portal category, for instance, Yahoo would be the least risky bet -- relatively speaking, of course -- since it has established itself on Wall Street as the dominant player in the search-engine market. America Online has gained star status on Wall Street as the premier content provider and Amazon.com and eBay have staked out dominant positions in the retail e-commerce business.
"We want the first-mover advantage and extensive reach," says Michelle Espelien, of Invesco's technology fund.
Most of the action lately, however, among savvy technology investors has been dabbling in the second- and third-tier Internet players, where investors hope they'll land bigger returns.
"The institutions missed the first runup with the top-tier players. So now, they are bellying up to the bar with the second-tier players," says Gary Tanaka, who runs the technology fund at Amerindo. "We're looking for the big Net plays and you'll find that a lot of them are coming from the second-tier players." He likes Lycos as an alternative to Yahoo and Broadcast.com as an America Online alternative.
Indeed, Lycos is emerging as a darling at the moment among technology investors. "They've shown great reach numbers," says Ms. Espelien, meaning the number of people visiting Lycos's site is only slightly behind Yahoo's. "Maybe the valuation discrepancy between the two stocks is too large," she says. Lycos has added luster as a potential acquisition target as well, investors say.
For investors with nerve, "there are a lot of stocks out there that haven't gotten as much of a fire under them as others with businesses that are still solid," says Cathy Baker, a manager and analyst with Robertson Stephens's emerging-growth fund. Exodus, for instance, "hasn't had the magnitude of upside yet but they have a very solid real world outsourcing business," she says. She also likes Concentric Network, an Internet-access provider that focuses on the business market.
Lots of big investors like CMGI, which is a venture capital-type company that has helped hatch some big Internet successes, including GeoCities, and is fast becoming a big favorite among institutions even though it has not yet gained household-name status.
Neal Miller, portfolio manager with Fidelity's New Millenium fund, calls CMGI, his fund's biggest holding, a "fascinating hotbed. They've done a great job of creating companies that feed one another," he says.
Perhaps no group on Wall Street has had as tough a time getting a piece of the Internet action as earnings-momentum investors, whose investment style of looking for steady earnings growth runs contrary to Internet investing. One Internet play even a momentum investor can love, however, is VeriSign, according to Michael Hahn, a portfolio manager with Pilgrim Baxter's technology and communication fund. VeriSign provides fancy software that authenticates users' identity for transactional purposes on the Internet and is on the verge of posting real earnings.
Some hedge funds that have concentrated their efforts on Internet plays like TeleBank, which is able to pay higher rates on everything from savings accounts to money-market instruments since their costs are lower than traditional banks with their high bricks-and-mortar overhead costs.
Do the pros agree on which Internet stocks to avoid?
You betcha.
A few names that day traders may love but haven't earned the respect of Wall Street include K-tel International, SkyMall and Egghead.com.
"When people talk about the bubble," says Phoenix's Mr. Mills, "that's what they mean." |
