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.