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Q1 Results Show Shakeout Just Starting

Internet investors battered by last year's ticker implosion and anxious to put the dot.com shakeout behind them had better stay in their bunkers for awhile. More ugliness lies ahead.

Despite some seemingly positive trends, first-quarter trading results show the death rate for Internet stocks should accelerate this year. With 90 companies ending Q1 below $1 per share, and another dozen close behind, it is conceivable that the number of 'Net stocks trading on the major exchanges could shrink by about 30% before the year ends. Given the current state of the economy, that figure could edge higher.

Granted, when the dust from the wreckage clears, Internet investors will be better off for it. But to quote the great economic analyst Tom Petty, the waiting is the hardest part.

Here's a quick snapshot of the Internet stock landscape as Q1 repairs to the record books:

Only 100 of 365 'Net stocks tracked by the Internet Stock Report since the beginning of the year, or 27%, gained in the first quarter. Two stayed even, while 263 lost ground.

Of those losers, 119 'Net stocks fell at least 50% in Q1, while 54 plummeted at least 70%.

As mentioned above, 90 stocks closed the books on Q1 below $1 per share. A total of 163, or 45%, now sell below $2 per share, while 252, or 69%, trade below $5.

Remember the days when 'Net tickers routinely sold for more than $100 per share? As Q2 begins, none are higher than $50 per share, and only 16 trade for more than $20.

Now let's look at Q1 results broken out by sector:

                                 

                         %Change   Gainers   Losers   Under $1   

Financial Services        21.7%       6        6         2      
E-tailers                 15.3%      20       13        16     
ISPs/Access Providers     10.7%      12       13         7     
Content/Communities      -11.9%      14       23        15     
Consultants/Designers    -17.3%       6       13         6
Portals/Search           -18.8%       4        8         1
Security                 -20.0%       4       11         1
Advertising/Marketing    -20.9%       3       13         6
Performance Software     -25.3%       9       40        10
E-commerce Enablers      -28.7%      11       39         9
Internet Services        -30.8%       8       42        14
Speed/Bandwidth          -47.3%       3       22         2
Wireless                 -58.3%       0       20         1

                                    100      263

What I found surprising was that three sectors actually showed an overall gain in Q1. But a look beneath the surface shows that even the bright spots are tarnished. For example, the 21.7% gain by the top-performing Financial Services sector looks impressive. However, that percentage is skewed greatly by E-Loan's 275% YTD gain (up to $1.88 from 50 cents per share). Remove that, and the sector posts a slight gain of 0.6%.

Then there are the E-tailers, the only sector with more gainers than losers in the first quarter. About half of its members are among the stocks selling below $1. E-tailers, of course, were among the hardest-hit 'Net stocks last year, and many of these companies were bouncing off record lows in Q1.

Conversely, two of the sectors that outperformed most others last year -- Wireless and Speed/Bandwidth -- plunged dramatically in Q1. Again, there's no mystery here: Both contained a number of stocks, such as Palm, Wireless Facilities and CacheFlow, that entered the new year with excessive valuations. There was nowhere to go but down.