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RealTime IT News

Sideline Money Will Determine Future of 'Net Stocks

Internet stocks have so dominated media coverage of Wall Street and online trading message boards in the past couple of years, it's hard to believe there are any investors out there without at least some position in a 'Net play.

However, three-quarters of investors have never owned a single share of any Internet company, according to the latest Index of Investor Optimism, a joint survey by PaineWebber and the Gallup Organization.

Not surprisingly, many investors who had purchased Internet shares either cashed out profits or cut losses in the turbulent months following this spring's tech stock meltdown. The percentage of investors holding 'Net stocks dropped to 19% in July from 24% in April.

From these bits of information, you can draw two starkly different conclusions about Internet tickers and their future.

One is that the ceiling for active investing in Internet stocks is about 25%. That is, only one out of four investors will ever be willing to bet on the 'Net.

If that is the case, then it's highly unlikely we'll again see the kind of gold rush which sent Internet shares soaring to extraordinary highs from fall 1998 through mid-March.

That extended run-up was due to a combination of opportunism, momentum trading and simple supply and demand. At the beginning of 1999, there were fewer than 100 Internet stocks to choose from. Today there are more than 400, with new tickers being added each month, despite the slowdown in the IPO market. If the pool of investors doesn't grow beyond 25%, that money will be spread too thin to support all but a few dozen Internet stocks, thus making predictions that 75% of Internet companies won't survive seem overly optimistic.

The other conclusion, and the one to which I subscribe, argues that as the attrition process weeds out the weak 'Net companies, many investors who have stayed on the sidelines will jump into the game. These investors - call them cautious, timid, patient or smart - have been waiting for the eventual Internet winners to emerge before placing their bets.

And while they undoubtedly will focus their investments on a small number of dominant companies, the flood of money that new 'Net investors will loose upon the entire Internet sector should lift many boats, directly or indirectly.

Though it will be a slow process, expect the sideline money to begin entering the fray this fall as the 'Net stocks picture becomes clearer.