Play It Safe When Going for Internet Stocks
By James K. Glassman
Wednesday, February 3, 1999; Page E01
Senators care about stocks -- for public-policy as well as strictly personal reasons. So it was not surprising, when Federal Reserve Chairman Alan Greenspan testified before them last week, that they asked him about Internet shares.
Greenspan warned of a "lottery mentality" among investors. But he conceded that their wagers made some sense: "The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different vehicles. And undoubtedly some of these small companies . . . are going to succeed. The vast majority are almost sure to fail."
Then he added, "You wouldn't get hype working if there weren't something fundamentally potentially sound under it."
Let me interpret: The Internet is for real, but guessing which companies will be the winners is nearly impossible. Still, investors are not stupid, and it's important to have a healthy respect for the market.
I think it makes sense for investors to include Internet stocks in their portfolios. Sure, it is difficult to value a stock of a company such as Amazon.com Inc. (AMZN), the online retailer, which probably won't have earnings for a year or more. But it is not absurd to let other investors do the valuing for you.
My own high opinion of Amazon is based on using the product, which is fabulous. And familiarity often breeds success in the stock market. That is the philosophy of Peter Lynch, the former manager of Fidelity Magellan fund and one of the best stock pickers in history. He argued that investors should buy companies that sell things they know and like.
But it would be foolish to buy Amazon or any other Internet stock by itself. And it would be insane to try to jump in and out of such shares in short-term speculation, the way e-trading hot shots do. Investing in the Internet is a highly risky proposition.
The rule with Internet investing has to be: Don't skimp on safety. There are two good ways to dampen your risk: 1) hold for the long term, and 2) diversify.
"If you are investing in the Internet," said Alexander Chung, "you had better have a three- to five-year time horizon. . . . The Internet is still in its infancy. Over time, there will be new business models, and lots of unforeseen changes." One, said Chung, is taxation. Internet commerce is enjoying a tax holiday for the next three years, but who knows what will happen after that?
Chung is the manager of Bethesda- based Monument Internet fund (1-888-420-9950, or on the Web at www.monumentfunds.com), one of several new funds devoted to the sector. From its founding Nov. 16, 1998, through Feb. 1, it has returned 96 percent, and it's up 48 percent in the past month alone.
Other such funds include: WWW Internet Fund (606-263-2204), which has returned 38 percent this year; the Internet Fund (1-888-386-3999), up 50 percent in 1999; and Munder Net Net (1-800-438- 5789), up 100 percent over the past three months.
Chung, who also manages two funds for Monument that invest in Washington-area stocks, takes a relatively conservative approach to the Internet. He is well- diversified, with his top five holdings representing only 20 percent of the portfolio, and he focuses on companies that are actually profitable -- or are on the brink.
For now, he told me, "Internet companies that will make money will provide basic equipment, enabling technologies and services." As a retailer, Amazon does not fit that category.
Monument Internet does own a little Amazon (about 2 percent of the 40-stock portfolio), but, said Chung, "we took some profits."
He is more excited about companies such as USWeb Corp. (USWB), a consulting firm that provides one-stop shopping for firms that want to do business on the Internet; DoubleClick Inc. (DCLK), which places advertising on more than 60 Web sites, including AltaVista and The Dilbert Zone, for clients such as Microsoft Corp. and AT&T Corp.; and Aware Inc. (AWRE), whose DSL (digital subscriber line) technology allows faster Internet access through conventional copper phone lines.
Chung also owns shares in companies that provide Internet security, so that buyers and sellers who have never seen each other won't be duped: VeriSign Inc. (VRSN), Entrust Technologies Inc. (ENTU) and ISS Group Inc. (ISSX).
While perhaps less risky than some Internet highfliers, these stocks should not be confused with, say, General Electric Co.
If you want Internet exposure with more safety, then the obvious choices are America Online Inc. (AOL) and Yahoo Inc. (YHOO), both of which enjoy top ratings ("1") for timeliness from Value Line. Or balance pure plays with companies that have Internet stakes but provide their own diversification, such as MCI WorldCom Inc. (WCOM), the largest holding of Munder Net Net, or Compaq Computer Corp. (CPQ), second-largest holding of WWW Internet Fund.
Perhaps the most solid of all Internet stocks is Cisco Systems Inc. (CSCO), which supplies networking products that are essential to all Web activity. Cisco, for instance, has an 85 percent share of the market for routers, which tell messages where to go. The stock took a dive in October to $43.88, but it closed yesterday at $112.39. Cisco makes real money, too -- $1.4 billion last year, up 30 percent, but its price-to-earnings ratio, based on estimated profits for the fiscal year ending in July, is 73.
As for diversification, the easiest way to get it is through a fund, but all of the Internet specialists lack track records. As Josh Charlson wrote last year in Morningstar, "Investors who are uneasy with the inexperience of the new funds may want to hold out" -- or buy broader technology or aggressive-growth funds that include Internet stocks in their portfolios. At any rate, safety counts, even with high-tech highfliers.
Glassman's e-mail address is jkglassman@aol.com; he welcomes comments but cannot answer all queries. |
