E-Mailbag Monday: Looking Back at the Past Few Weeks

For today’s Email Bag, I will answer the one question that I have been
receiving with great frequency: Is it over for Net stocks?

There is an old saying: “In a recession, your neighbor is out of work. When
there is a depression, you are out of work.” For all Net investors, it has
been a depression.

While a 10 percent decline is considered a correction, a 20 percent decline is termed a
bear market. As for the NASDAQ, the index is 32 percent off its all-time
high. Yet, this does not capture the carnage of the Internet sector, which
has been punished the most.

There must be reasons for such a sell off. And, in the past few weeks,
there have been many. There was the adverse judgment against the mighty
Microsoft, the epitome of high-tech. There has been Greenspan’s insistence
on a hawkish anti-inflation stance on interest rates. And so on . . .

But we are likely never to know the real reasons. The markets are highly
complex. After all, academics are still trying to figure out what
precipitated the crash of October 1987.

Despite this, there are many lessons to be learned. First of all, wise
investment requires diversification. Yes, buying Old Economy stocks is
boring. You won’t get rich overnight. Yet, when you are planning for your
future, you need to have a well thought out portfolio that attempts to
optimize rate of return and risk.

Margin should be used sparingly. It should not be a way to “swing for the
fences.” When markets collapse, margin can be very punishing. It usually
means an investor cannot take advantage of bargains.

Let’s take a look at some other things that may result from the NASDAQ

Business Model: I have been covering IPOs since Netscape dazzled the
world with its offering. I have read innumerable times in SEC filings that a
company would not see profitability in the “foreseeable future.” Well, this
will be less common. Investors want business models that make sense. They
want profitability that is foreseeable.

More Blow Ups: Another haunting phrase is “going concern.” This is
when an auditor deems a company to be running out of cash. Cash is king.
Yet, as the equity markets get selective, more Net companies will run out of

Vulture Funds: Incubators and VC funds have been the hot things. Now,
expect a plethora of vulture funds. Seeing the low valuations, these funds
will specialize in restructuring struggling companies. Who knows, perhaps
some of these funds will go public.

Privatization: Over the past few years, the financial markets have
emphasized equity financing, such as in the form of IPOs and secondary
offerings. However, it appears that there is an oversupply of equity. What
next? One idea is for companies to go private. This will likely be done
using debt. Of course, this only makes sense for those companies that have
strong cash flows.

Another idea is for VCs to buyback the companies that they took public. VCs
are currently flush with tremendous amounts of cash.

Finally, prominent investors may become big buyers. This was evidenced a few
weeks ago when John Doerr and Jim Clark purchased $220 million Healtheon (HLTH)

Blue Chip Net Companies: Even though the NASDAQ collapse has affected
all stocks, the fact remains that blue chip Net companies still have plenty
of cash and nice market capitalizations. For example, Amazon.com has a
market cap of $16 billion. Don’t you think they see some opportunities here?
Actually, it would not be surprising to see Amazon.com buy the companies
that it has invested in, such as Drugstore.com (DSCM),
Audible (ADBL),
and Ashford.com (ASFD).

Of course, there are many struggling private Net companies that will be
looking to be bought out. One idea is for several of these companies to be
rolled-up and then sold to Amazon.com or Yahoo!

Brick-and-Mortar: Many brick-and-mortar companies have missed out on
the transition to the Net. Yet, they know that they must have a strong
presence. With low valuations, expect brick-and-mortar companies to bolster
their Net strategies by buying these companies.

IPO Market: The first-day moonshots are likely a thing of the past.
Many investors have been burned on high-flying IPOs. So, expect a slowdown
in the IPO market.

Bounce: Market crashes do not necessarily spell disaster. Actually,
they are usually great buying opportunities. In 1998, the NASDAQ fell 32.6 percent.
In 1990, the index fell 30.7 percent. Avoiding the NASDAQ at these times would have
been a big mistake.

And it would be a big mistake to avoid NASDAQ now. There are many great
bargains. True, the volatility may be wrenching and the markets may even go
lower. But over the long term, there will be great returns from NASDAQ.

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