Internet stocks fly high, but questions linger Soaring returns fuel big rush, but issues lack track records


July 26, 1998|By Bill Atkinson

DAVID Polischeck's phone crackles with calls from brokers demanding the skinny on Internet stocks.

Polischeck, a research liaison for Legg Mason Inc. in Baltimore, has been blitzed lately by calls from colleagues because their clients have caught Internet fever.

"It's the big topic," Polischeck said. "We get a lot of questions. People ask: 'Should I buy in now, or have I missed? Why is this stock down? Or are there any new issues [initial public offerings] coming out?'

"Anything with the 'dot com' in it, they are very interested in," Polischeck said.

Who can blame investors when Internet companies are the hottest stocks on the planet? Companies such as Inc. have fueled the fever.

The Dallas-based company, which broadcasts sports, news and music over the Internet 24 hours a day, went public on July 17. Its shares jumped $44 the first day of trading, closing at $62.75.

It's not the only Internet stock making investors salivate.

America Online Inc.'s stock has jumped nearly 270 percent in the past 12 months. The company went public six years ago and its market capitalization -- the price of its stock times the number of shares -- is $26 bil lion, above Kimberly-Clark Corp.'s $25 billion market capitalization, and closing in on Minnesota Mining and Manufacturing Co.'s $31 billion market capitalization.

Yahoo! Inc., which has developed a tool that helps people find information on the World Wide Web, has seen its shares rise 475 percent in the past 12 months to around $182.

And Internet book seller's share price has soared a mind-boggling 816 percent to about $124 in the past 12 months.

In August, a smart investor could have snapped them up for a song -- $11.625.

Even shares of K-tel International, a Minneapolis purveyor of cheesy rock 'n' roll, disco and gospel albums, has seen its shares scream like a Fender Stratocaster guitar.

In January, the stock languished at about $3, and trading was slim. But in the spring, when investors found out that the company was going to sell albums over the Internet, K-tel's shares rocketed to a high of $33.93 on May 5, on volume of 25 million shares. It has since pulled back to about $10.

"These moves are amazing," said James A. Kujawski, a broker at Prudential Securities Inc. in Baltimore. "One of these days the music is going to stop on the Internet stocks."

What baffles experts is that many of the Internet stocks don't have earnings, let alone a track record. They argue that investors aren't buying them on fundamentals, but rather on a hunch that the Internet will mean booming business ahead., for example, has yet to make a penny, and it is competing in a slowly growing market for books. But its stock has more than tripled in the past two months.

Its market capitalization is $6.1 billion, rivaling brokerage company Bear Stearns Inc.'s $6.6 billion.

Not bad for a company with $203 million in net sales and a loss of 64 cents a share in the first half of the year.

Kujawski wonders whether investors would be better served putting their money into Barnes & Noble Inc. The nationwide bookseller, which has a market capitalization of $2.9 billion, made $53 million last year and sells books on the Internet to boot.

"If you are a fundamental buyer and you go against the grain from time to time, you certainly are not going to buy the Internet stocks," Kujawski said. "I can become pretty aggressive with my own money, but I've stayed away."

The furious rise of Internet stocks sounds all too familiar to some market veterans who remember the oil craze and silver mania of the 1970s, and the biotechnology craze in the late 1980s.

"Right now it is a panic to get a foot into the business because everybody perceives this as the next technology," said Rob Brown, chief market strategist at Ferris, Baker Watts Inc. in Baltimore.

"There are big winners if you can pick the winners. But the majority of people investing in these things will be hurt."

What generally follows big booms is big shakeouts, Brown said.

"I think the industry is overpriced, and it will go from yahoo to boohoo real quick," Brown said.

Pub Date: 7/26/98

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