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Markets' Rally Leaves Internet Stocks in Dust

Posted on: Thursday, 20 July 2006, 06:00 CDT

By Matt Krantz

Stocks jumped Wednesday, but don't mention that to Internet investors. They might think you're rubbing it in.

Despite a big rally in stocks Wednesday, Internet stocks fell further into their yearlong malaise, making it appear as if a mini dot-com bubble is bursting.

Yahoo was to blame Wednesday after the online media company late Tuesday said it would delay the launch of a new advertising system designed to make it more competitive with Google.

Investors punished Yahoo, pushing its shares down $7.04, or 22%, to $25.20. That was the stock's worst one-day percentage loss since it began trading in 1996, and the drop destroyed $9.9 billion in shareholder wealth.

Internet stocks' troubles run deeper than Yahoo, though. So far this year, the USA TODAY Internet 50 index is down 10%, which is even worse than the 5.7% loss by the tech-heavy Nasdaq composite.

The pain was even more severe at individual dot-coms: EBay, Amazon and IAC/InterActiveCorp are down 40%, 27% and 14%, respectively. Yahoo and eBay are now the 10th- and fifth-worst-performing stocks in the Standard & Poor's 500 this year.

Some investors fear Yahoo's recent stumble indicates more trouble ahead. Yahoo's system delay means it could miss out on the busy year-end advertising season, says Scott Kessler, stock analyst at S&P, who downgraded Yahoo to a "hold" from a "buy" Wednesday.

And Yahoo and other Internet stocks now are being forgotten by the fast-money crowd of investors who are instead pouring into energy and airline stocks and commodities, Kessler says. Internet companies are also losing their allure as they mature and become more predictable. They're "solid, but not sexy," he says. Yahoo's second-quarter earnings, for instance, simply met Wall Street's estimates.

Others think Wall Street is getting it wrong with the Yahoo and other Internet stocks, creating a chance to buy. Philip Remek, analyst at Guzman, says the Yahoo system delay isn't a big deal and won't hurt its race with Google. "Everyone gives Google credit, and no one gives Yahoo a break," he says.

Kevin Landis, portfolio manager of the Firsthand Funds, says Internet stocks performed so well in the past three years, a pullback was expected. The USA TODAY Internet 50 index jumped 83% in 2003, 2004 and 2005, more than double the 42% gain in the S&P 500.

"They were ripe for people to take profits," he says.

Internet investors understand they're subject to volatility, says Adrian Bachman, portfolio manager of the Rydex Internet fund. "This may be a good time to be buying the sector, given the sell-off we've seen," he says.

*'Bernanke rally,' 3B

*Market highlights, 6B

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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