Internet Stocks

October 20, 1998

Today's close: Dow 8529, S&P500 1067, NASDAQ 1655
October 10:    Dow 7899, S&P500  984, NASDAQ 1492
July peak:     Dow 9337, S&P500 1186, NASDAQ 2014

I'm a little late writing this, been out of town.  But better late than never.
The market's been up sharply since I last wrote: the Dow is up 630 points (8%),
the S&P is up 83 points (8.4%), and the NASDAQ is up 163 (10.9%).  This rally
is, of course, attributed to the Fed's surprise cut in the discount rate from
5.25% to 5%.  The market had been hoping for a full half point cut in interest
and was disappointed in the quarter point cut earlier.  Now they've got their
full half point rate cut.

The volatility of the market these last two weeks has been quite high, especially
in the NASDAQ.  There is great uncertainty whether this whole movement from the
July 17th peak is the beginning of a bear market, or just a buying opportunity in a
continuing bull market.  My opinion is that it's a bear market.  I'm a believer
in the Dow Theory which as I see it gave a Bear Market signal August 4th.  The
Dow Theory has held up pretty well over a century of market fluctuations.  The
popular idea that a bear market is defined by a 20% drop seems futile to me - what good
is a signal that doesn't happen until 20% is already lost?  If the Dow Theory is
right, then we've got three to fifteen months of bear market still ahead of us,
judging from the length of past bear markets.  Bottom line is it's still too early
to buy, and may be a good time to lighten up on stocks.

Let's have a look at those darlings of the market, the Internet stocks.  This data
is from yesterday, but it will do for talking purposes (too early to buy anyway!).
(Data is from the "Profile" option at quote.yahoo.com).

Symbol  Stock           Price   EPS     P/S     Peak    %Peak           
CDNW    Cdnow           9       -2.10   3       39      23%             
XCIT    Excite          31      -2.27   11      55      56%             
CYCH    CyberCash       7       -2.21   12      27      26%             
SEEK    InfoSeek        22      -0.43   12      45      49%             
LCOS    Lycos           29      -3.10   16      53      55%             
AMZN    Amazon.com      106     -1.03   16      147     72%             
RNWK    RealNetworks    37      -0.87   25      48      77%             
EBAY    Ebay            45      +0.04   40      54      83%             
BCST    Broadcast.com   41      -0.86   43      70      59%             
YHOO    Yahoo!          117     -0.24   69      134     87%             
INKT    Inktomi         84      -0.98   97      88      95%             
                                                                
For comparison:                                                         
MSFT    Microsoft       102     1.87    17      119     86%

The P/S column is price/sales ratio.  The high flyers almost all lose money, so it is
more meaningful to look at the sales ratio rather than the price/earnings ratio.  A
mature blue chip stock might trade at P/S of 1 to 3.  A growth stock like MSFT manages
17.  Some of these Internet stocks go to astronomical ratios (I've left out a few
that are just ridiculous).  The ones that trade below Microsoft's P/S of 17 look
reasonably priced to me.  I wonder about CDNow - the price is so low that there must
be something going on that I'm not aware of.  The others (Excite, CyberCash, InfoSeek,
Lycos and Amazon.com) are starting to look interesting.  As a group, they're half
off their highs, and with this bear market happening, they're likely to go lower.

As with any company losing money like these are, it make sense to figure out how long
they can go on losing money at the current rate before going bankrupt, or more likely,
having to raise more money, which usually means a dilution for the existing shareholders.
We'll look at those numbers later, when the 3rd quarter reports are in.

Richard Gillmann (richard@nwfolk.com)
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