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Beyond Hot, Scorching: Where Are The Picks For '98 Now?

Three months ago in the December 31, 1997 edition of Internet Stock Report, at a time when Wall Street shunned Internet stocks, we picked 10 companies with the claim that they may be the ones to watch for 1998.

As most investors toasted blue chips and fried small caps on that hallowed eve, as many a portfolio manager sang auld lang syne to new fangled Net startups, we simply suggested "Take a look at these 10 stocks." On March 26 we checked up on the 10. Guess what? As a group they're up 84% in three months.

Check the numbers:

The ISDEX Magnificent 10, So Far

Hot Stocks To Watch '98   ISDEX Spotlight Share Share  
    Ones We Said To Watch On 12/31/97: Did You? price price Percent
Company Symbol Why 12/31/97 3/26/98 change
@Home ATHM Internet at high speed $25.13 $34.00 35%
AOL AOL World's largest aggregator of eyeballs & wallets $45.25 $66.88 48%
Concentric CNCX Virtual networks & corporations $8.88 $19.00 114%
Earthlink ELNK Customer service king $25.75 $56.13 118%
Infoseek SEEK Discount to peer group $10.75 $18.25 70%
Network Solutions NSOL WorldNIC moves looks smart $13.13 $30.00 129%
Onsale ONSL The bidding has only just begun $18.00 $32.75 82%
RealNetworks RNWK All ears and now eyes, too $13.88 $24.50 77%
Sportsline SPLN CBS Olympic reach $10.75 $28.88 169%
US Web USWB Turnkey Web services $9.38 $21.88 133%
    TOTAL 180.88 332.25 84%
© 1998 Mecklermedia. www.isdex.com   AVERAGE 18.09 33.23 84%

At the time we made these observations, the central point to much of this was that we believed Internet stocks were severely undervalued, and that last year's hoo haa parade for the market left Net stocks flat. ISDEX started and ended 1997 at about 100.

Meanwhile, the Dow and S&P, and even NASDAQ, had fairly good returns in 1997. With its sideways motion we saw that perhaps at least 25% upside existed in the ISDEX itself (the entire group, not just the 10 shown here) if investors valued small cap stocks at all. If there was indeed a party on Wall Street the only ones not invited as of that champagne annual eve were Internet stocks, and that they too may be invited to stretch their legs and run.

The same reasons noted just three months ago for why the 10 had potential in our analysis is the same reason why we believe the 10 still could have potential.

Most analysts said that Network Solutions (NASDAQ:NSOL) was dog meat in 1998 because its monopoly on registering domains was ending. While the monopoly status is ending, we saw beyond that to the enviable position that NSOL already has in our view--all those millions of .com domains already registered on it for a period of two years.

As each comes up for renewal we believe that inertia will perhaps favor Network Solutions. People may want to pay another $50 to keep the URL right where it is rather than mess around with price comparison shopping for other domain registrars.

We see the cost of switching to be more of a hassle than anything else. Analogy: how many businesses with Yellow Page listings take those listings elsewhere based on price? Not many we suspect.

Earthlink (NASDAQ:ELNK) had a phenomenal run which we fully expected. It appears we were right when we said that customer service counted. Sprint thought so and bought a chunk of ELNK at $45 a share and will feed it new subscribers for the next several years. How did we come to that conclusion? We talked with Earthlink founder Sky Dayton and realized the management team at Earthlink was much stronger than Wall Street knew, that the sheer talent there would make something happen. It did.

We think RealNetworks (NASDAQ:RNWK) may have as many as four or five different businesses right under its belt if it can see them. We're not going to get into publicly saying where the opportunity lies.

ONSALE's (NASDAQ:ONSL) model, in our view, may be the purest e-commerce model yet: auctions. Someday maybe everything will be sold this way. Let the market decide.

Everybody looks at Yahoo! (NASDAQ:YHOO) as the AOL killer. In the very first Internet Stock Report on April 9, 1996 we said Yahoo! was what AOL wanted to be when it grew up on the Web. Sure enough, two years later Yahoo! is the number one Web service.

We think @Home (NASDAQ:ATHM) may be a late bloomer, that high-speed Internet services are inevitable, that it could be on the 90 yard line with 10 yards to go--but those are the hardest 10 yards!

Trouble is, the cable firms have lousy reputations with consumers. After being milked for every new channel for 25 years, consumers are fed up with TCI, Time Warner, Cox, and Comcast.

So @Home's got a job to do to overcome the bad seeds cable has sown for all those years. Customer service is king. If they get that up front then watch out. @Home may very well be the next generation Internet model, if it can muster the Net talent beyond Milo.

And no, we're not recommending any stocks here. See the disclaimer. We'll check back on this group again soon.