The Coming Internet Depression?

Typically, on Monday’s I answer reader mail. However, I’m devoting today’s
piece to many common questions in the past few weeks: What’s happening to
Internet stocks?

Simply put, Wall Street has become hypersensitive to any inkling of bad
news. Unfortunately, with a slowing IPO market, higher interest rates,
escalating energy prices, dot-com blow-ups and even signs of international
turmoil, it is hard for companies to avoid bad news.

Of course, even the Internet blue chips have been obliterated. The most
notable example is
. As one analyst said, investors are “naming their price” for
this stock. On Friday, the stock was at $5-9/16, which was a mere $926
million market cap. Less than a year ago, the stock was over $100 per
share. In fact, the company has lost nearly 80% of its value since mid-September.

Interestingly enough, Prince Alwaleed bin Talal recently invested in, and has lost millions (oh, by the way, he has a large
investment in Apple, too).

Then again, the Prince has a diversified portfolio – on the order of about
$20 billion. In other words, when investing in high-tech (and especially
Internet stocks), it is critical not to concentrate most or all of your
assets in these investments.

But even the “big boys” have problems with this. Look at Bernie Ebbers, the
CEO of WorldCom .
This week, he had to sell 3 million shares so as to meet a margin call.

I think there is another important thing to consider when investing in
Internet stocks: cutting your losses. I recommend that you place stop loss
orders on your positions. In fact, I would suggest about 15 to 20 percent
below the purchase price. A stop-loss is not full-proof, especially if the
stock plunges more than 20%. But, experience has shown that a small, steady
fall preceeds a major fall in a stock. is a key example.

With the markets anathema to surprises, I would not buy any stocks before
their next earnings report. A case in point is
Yahoo! , which will report
its earnings tomorrow (after the close). On Friday, the company had a new
52-week low of $79-7/16. The stock was as high as $250-1/16.

Sure, the stock has fallen substantially already. And, the company is
profitable and still growing fast. But its valuation of $44 billion still
looks like a premium valuation. Adverse news could pound the stock and,
unfortunately, lead to further declines with the Internet sector.

The fact is that Yahoo! relies heavily on online advertising revenues (about
80% of all revenues). With dot-coms running out of money, how is Yahoo!
going to sustain its growth rate?

However, I’m not implying I’m a “doom and gloom” peddler. I’m extremely
bullish on the Internet sector. There are tremendous values in the
marketplace. In fact, I was happy to see BusinessWeek’s cover story of the
“coming Internet depression.” Such front-covers are a good sign that the
market is poised for upside. But, as always, it is still prudent to keep in
mind the old values of investing: diversification, limiting losses and
focusing on solid companies.

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