Posted on: Friday, December 27, 2002

Another sell wave hits dot-coms

By Matt Krantz
USA Today

Dot-com investors are getting another harsh lesson in the dangers of bubbles. After a rally in October and November, Internet stocks are getting whacked again.

While the broader market has had its problems in December, Internet stocks have run into serious trouble: The USA Today Internet 50 index is down 10.4 percent this month, more than twice the 5.0 percent drop in the Standard & Poor's 500.

Yesterday, Amazon.com was emblematic of Internet stock investors' pain, losing 7 percent to $20.30 as the Internet 50 fell 1 percent, more than three times the S&P's loss. Amazon's stock is off 13 percent in December.

The slide is a sharp turn from a month ago, when Internet stocks were zooming and sporting P-Es reminiscent of the bubble days. "There was a resurgence in speculation," says Scott Kessler, Internet software and services analyst at Standard & Poor's. "But at some point (investors) must look at the valuations."

That's exactly what repentant investors now are doing, says Manu Daftary, manager of the Quaker Aggressive Growth fund. While Amazon fell yesterday, Wal-Mart and Target rose modestly despite disappointing sales news. "Now it seems people are getting away from (Internet) stocks" having recognized there are so many risks, Daftary says.

The rapid deterioration shows:

• Nearly all dot-coms are vulnerable. Of the Internet 50 index stocks, 36 have trailed the S&P 500 in December. Half have lost a tenth of their value, including online broker E-Trade, down 15 percent.

• P-Es do matter. Internet stocks with the highest P-Es at the beginning of December have suffered the most. For instance, WebEx and Expedia, which had among the highest price-earnings ratios at the start of the month, are down 18 percent and 13 percent, respectively.

• Dot-com losses can still be large. Investors aren't getting any downside protection, even though most Internet stocks are 70 percent or more off their 2000 peaks. For instance, 11 of the Internet 50 stocks have lost 20 percent or more of their value in December, including Hotels.com and Sun Microsystems.

Internet losses could be a good sign in terms of the broad market recovery's staying power. Some analysts say the selling shows capital is being allocated in a sober fashion and that speculation is back in check after a brief resurgence in October and November.

"It's a sorting-out process," says Hugh Johnson, strategist with First Albany. "It's a flight to quality."