White-Hot Internet Stocks Get Hotter Still
First comes the surge, then the frenzy, followed by the mania. But what comes after that?
In the world of Internet-related stocks, maybe we’re finding out.
That stock sector continued its upward spiral on Monday, with many of the shares catapulting dramatically higher despite little real news.
Yahoo Inc., the popular Internet directory company, zoomed $26.38 to a record $199.25, for a 15% one-day advance.
But that was modest compared with the gains of other Internet-connected shares Monday, some of which soared more than 50% for the day.
Analysts said two forces helped propel the latest rally in the group: takeover speculation and a planned stock split by Yahoo competitor Lycos Inc.
But as the stocks’ breathtaking advance continues, there’s an even more basic force driving them: sheer momentum, as investors pile on.
“Any stock that goes up $10 a day generates interest in itself completely irrespective of any fundamental merit,” said Anthony Blenk, an analyst at Everen Securities in Chicago.
What’s more, a look behind the numbers shows that the buying pressure is coming not from seasoned Wall Street professionals adept at playing risky stocks, but from individual investors who appear to be falling over themselves trying to make a quick killing.
Indeed, a fair number of small investors seem to be using what they think is a no-brainer strategy: Buy a few hundred Internet-related shares--and sell them a couple of hours later.
That game won’t last forever. History shows as much. Still, there’s no telling when this Internet stock ride will end. Indeed, the duration of the group’s advance since 1996 has surprised many experts who expected it to crumble long ago.
Internet-related stocks have rallied feverishly since February and have been absolutely scorching in recent weeks. In several periods, they’ve risen so frantically that it appeared the bubble was ready to burst.
In late April, for example, small, little-known Internet-connected issues ballooned for several days before falling back. Leading the pack then was K-Tel International, which leaped from $3.25 in early April to $39.47 a month later after announcing plans to sell its recorded music over the Internet. But K-Tel has since plunged back to $14.19 a share, more than four times its April low price but 64% off its peak.
The group as a whole, however, has been resilient. Part of that no doubt stems from the Internet’s seemingly limitless potential.
That notion was fed last month by Walt Disney Co.’s almost $500-million deal for a 43% share of Internet search engine Infoseek, and the $64-million deal by General Electric Co.’s NBC-TV unit for minority stakes in CNet Inc. and its Snap online service.
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What are these stocks truly worth? Stocks normally are valued by comparing share prices with per-share profits. But that’s impossible to do with Internet stocks because so few companies are making money--so far.
Anyway, it’s the future that matters for the Net, the argument goes. With big-name companies like Disney and GE pouring money into much smaller Internet companies, that’s all the justification some buyers need.
“The truth is companies in this space are strong enough to grow into these valuations,” said Henry Blodget, an analyst at CIBC Oppenheimer & Co. in New York.
Yet much of the recent buying appears to come from individual investors who don’t care whether the Internet’s long-term prospects pan out. They’re just trying to make a quick buck.
Take Lycos, for example. Its stock jumped Monday after the company said it would split its shares 2 for 1. Investors piled in because many believe that splits themselves are good for a stock.
But Monday’s trading numbers indicate that some investors were in the stock for the very short term.
Consider: In the final hour of the day, the stock registered 1,694 trades, according to Bloomberg News data. Of that number, 947, or 56%, were for 300 or fewer shares.
At Lycos’ closing price of almost $100, a 300-share block would change hands for $30,000. Because institutions rarely trade in blocks that small, it’s likely that a majority of those trades involved small investors.
Another 669 trades, or 39%, were for between 301 and 1,000 shares. It’s possible many of those trades also involved individuals.
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Why believe that many of those buyers are short-term traders looking for a fast buck?
Because the number of Lycos shares that trade publicly is only about 8.8 million. Yet almost 9.5 million shares changed hands Monday. Add that total to the millions of shares that have traded in recent weeks and it’s clear that many Lycos shares have been turning over and over again within a few days or even a few hours.
That trading isn’t all by small investors, of course. Wall Street dealers also may be actively trading back and forth. Regardless, the shorter the average investor’s planned holding period for a stock, the greater the risk that a frenzied buying surge will turn just as quickly into a selling panic--as K-Tel holders who bought near $40 a share have found out.
Beyond Mania?
Internet search vehicle Yahoo Inc.’s shares soared 15% on Monday to a record high, as smaller investors continued to pile into the stock. Monthly closes and the latest on Nasdaq:
Monday: $199.25, +26.38
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Source: Bloomberg News
