Every correction needs a trigger. Here’s this one: a blurb in Business Week from an analyst who said Internet stocks were overdue for a correction sends ISDEX tumbling, down 16% to 499.67, its biggest one-day drop this year. However, I’ve seen these before and the blurb isn’t what sent them downward. An observation doesn’t make an event like this occur, underlying cycles and trends cause them.
That explains why NASDAQ takes a similar trajectory albeit at a smaller percent loss, off 5%.
The underlying weakness is too many Internet initial public offerings finding too few buyers. More than 100 Internet stock offers have or are scheduled to ooze through the IPO pipe–too many offers, too many “.coms.” Investors pushed up new offers on zeal but the caffeine and enthusiasm had to wear off, it always does. In my 5 years as an Internet investment analyst I’ve seen this cycle over and over and over.
We don’t have to go that far back to see the last oasis turn into desert. July of 1998 was a peak followed by an August of malcontent. Plenty of issues in registration in July worried that the window had closed when August slammed it shut.
But as Fall progressed EarthWeb (NASDAQ:EWBX) brought a renewed liquidity to the market with one of the best first-day IPO runs of all time which set the stage for a strong Winter IPO market in general that lasted all of first quarter 1999 until last Wednesday when the top became unstable because of too many IPOs trying to make it to market quickly.
The frenzy poured into international markets with Internauts looking at the UK for the next “CMGI” in London Pacific (NASDAQ:LPGLY) or other UK stocks which seemed like bargains compared to their U.S. counterparts. While the international market may hold promise I think the core U.S. Internet equities market is saturated and needs time to be digested, dry out, shake out, separate the flotsam from the jetsam from things that float no matter what the weather or tidal conditions.
To me the selloff and panic once again provides an opportunity for those who want to own the leaders in each area, the pioneering marketshare firms a chance to buy at what could be more reasonable prices.
I think we could see more a correction for the next few weeks, with 10% to 15% drops from these levels for a wide swath of Internet stocks as we move into May. Once again, for the leaders getting caught up in the down draft it may provide an opportunity for those buyers to buy at 35% to 50% of where a majority of these stocks were just last week.
That isn’t to suggest that the tops we saw were sustainable, it’s my belief that the tops were indications of things to come for these companies, expected growth.
For now I think focusing on the category leaders makes the most sense, those in a position to ride out the storm with their cash positions strong. I would particularly focus on the handful of firms that just pulled off secondaries as well as brand-known category definers.
That’s the beauty of a correction, it instantly draws out the difference between risk and reward, speculation plays from established players. Viewed correctly I think a correction is a blessing in disguise.