Wild, Scary Ride for Net Stocks
Anything.com. That seems to be the mantra driving the fascination with Internet-related stocks, of which Yahoo and Amazon.com, at just a few years old, are the granddaddies. Prices have been at dizzying heights that left traditional investors gasping.
This Net mania has its worrisome aspects. The most obvious, of course, is that stock market rockets that blast into the stratosphere usually plunge back to earth. Wide price swings in Net-related stocks are becoming almost routine, and the stock markets, by and large, have managed to shrug them off. That may not be the case should Internet stock prices all start heading south, which could spark a broad market decline. The situation could be influenced by, say, developments in Brazil or Japan.
The institutional investors, such as mutual and pension funds, bought Net stocks big, helping to drive up the prices, and some now are beginning to unload the stocks at huge profits. A less obvious cause for worry is some of the current bunch of Net-stock traders--speculators, day traders (whose goal is to make a profit by dinner time) and other individuals interested in fast money, not long-term investment. Many of these new buyers have been willing to bet heavily on a short-term rise, even though a company’s earnings outlook or other fundamentals do not justify the lofty share prices being commanded. They abide by the “greater fool” theory, that no matter what the price, there will always be someone willing to pay more.
Perhaps the greatest cause for unease is that the volume and volatility of Net-stock trading have taken the market into uncharted waters--traditional stocks have never traded for long at such high price-to-earnings ratios in such volume. That volume puts pressure on a trading system that can barely keep up with the current influx of buy and sell orders.
The mercantile promise of the Internet is yet to be fully realized by corporate America, but the strain of its hot stocks on the market is all too apparent. The worry is not what will happen to Net-stock investors but rather that when they fall the rest of the market might come down with them. It’s reason enough to give the average investor pause.
