Wading Into the Dot-Com Stock Waters

With many Internet-related stocks well off their 1999 highs, “bargain” hunters have plenty of prospects to pick from.

TheStreet.com’s index of 20 leading Net stocks has fallen nearly 40% from its April peak, and some dot-com names have been marked down 75% or more.

The trick: Deciding what’s really a bargain in this high-growth, but extremely high-risk sector. Just because something’s on sale doesn’t make it a good deal.

Most Net stocks, of course, remain overvalued by standard market measures. Indeed, most have no earnings on which to calculate a price-to-earnings ratio. Many will certainly fail in the long run.

But any time a promising growth-stock sector gets pummeled so severely, there are usually opportunities for gutsy investors. The Internet isn’t going away.

Investors hunting for Net stocks have three choices: bet on a single stock; buy a Net-themed mutual fund; or buy a basket of Net shares.

The accompanying chart is a portfolio of 10 beaten-down Net stocks we assembled, putting it together the way an individual investor might: It’s a mix of big and small companies, market leaders and newer names.

Buying 20 shares of each stock would cost about $11,000 including standard online commissions of $19.95 per trade.

Because Internet investing at this point appears to be more art than science, no qualitative or other screen was applied in picking the stocks. It’s more gut instinct than anything else--which is probably how most investors are picking Net stocks these days, if they’re honest enough to admit it.

Though we used no strict criteria, we focused on stocks down 40% or more from their peaks.

We viewed Net service provider America Online, retailer Amazon.com and auction site EBay as no-brainers. Our theory is, if these giants don’t recover the entire sector might be toast.

That may be flawed reasoning in the fast-moving Net business, but these companies are premier brand names and what highly paid analysts call “first movers” in their segments.

E-Trade Group is a bet on the continuing growth of online investing. Though it’s No. 2 in the fiercely competitive Web brokerage business--which could suffer if this bull market more than stumbles--E-Trade’s grand plan to become a one-stop online financial shop sounds intriguing. The company’s technological growing pains, however, could make it particularly risky.

Internet investment firm CMGI, which has helped nurture successful companies such as portal Lycos, is sort of a cross between an incubator and a Web mutual fund. Whatever the Net’s next big thing is, CMGI might already have a piece of it.

Retailers EToys and Stamps.com are the type of “pure play” Net stocks that suddenly seem out of fashion. Some analysts shy away from one-trick ponies that might be vulnerable when others learn the same trick. But EToys and Stamps both have first-mover advantage and easy-to-use sites.

Silknet Software and Pilot Network Services are e-commerce specialists. Silknet’s products help companies with specialized marketing and customer service, while Pilot provides Net security and encryption.

Finally, RealNetworks, which specializes in audio-video content, could cash in as Net content inevitably gets snazzier.

These 10 could be duds; there are no guarantees, of course. We’ll revisit them in a month and see just what kind of “bargains” they were.

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A Basket of Net ‘Bargains’

These 10 Internet stocks are all at least 40% off their peaks. This portfolio would be a risky investment, of course, because almost all Net stocks are steeply valued based on traditional measurements and many of these companies have yet to turn a profit.

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Company Ticker Wed. close 52-wk high/low Est. ’99 EPS Amazon.com AMZN $90.94 $221.25/$21.69 -$1.87 America Online AOL 92.38 175.50/17.25 +0.61* CMGI CMGI 75.56 165.00/8.63 +0.10** EBay EBAY 87.69 234.00/8.44 +0.11 EToys ETYS 31.38 85.00/28.13 -1.08 E-Trade Group EGRP 23.44 72.25/2.50 -0.30*** Pilot Networks PILT 8.25 23.00/3.25 -1.43 RealNetworks RNWK 69.75 131.88/7.63 +0.08 Silknet Software SILK 28.44 52.38/15.63 -0.90 Stamps.com STMP 31.13 52.50/12.88 -1.08 S&P; 500 index SPX 1,301.93 1,420.14/923.32 +49.47

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EPS= earnings per share

*Fiscal year ending June 2000

**Fiscal year ended July 1999

***Fiscal year ended September 1999

Sources: Bloomberg News