Net return

Prospects of some Internet firms look dim

What happened to the Net? At one time, the sector had seemingly powered the Nasdaq. Now, it appears that a number of the companies that lit up the market are becoming some of its dim bulbs. Take, for example, Ask Jeeves (Nasdaq: AskJ), the Internet company that was supposed to help make surfing the Web easier by answering your questions without the technospeak. As of early July, the stock had plunged from $190.50 a share to $15.50 a share. Reports show that more than 23 dotcoms have fallen off of the Nasdaq during the first six months of the year because of bankruptcy or the dissolution of operations, while others are burning cash. And Lehman Bros. analyst Ravi Suria predicts that even one of the mothers of all dotcoms, Amazon.com (Nasdaq: AmZN), faces the prospect of running out of the cash reserves it needs to fill orders within a year, causing shares to drop to a 52-week low of $32.44, a river-wide gap from its top price of $113. (Other reports, however, state that the problems of Amazon.com may be overstated.)

Does all this news mean that you should avoid all Net stocks like the plague? Not hardly. The key will be to focus not on novelty but earnings. In fact, on July 12, battered Internet stocks got a boost when Yahoo! (Nasdaq: Yhoo) reported earning 12 cents a share in the second quarter, beating analysts’ estimates by 2 cents. And the bellwether Internet firm was able to achieve this goal during one of the toughest quarters for Web-focused companies. The news lifted the Nasdaq 143.17 points, or 3.62%, to 4099.59. The significance: it was up a minuscule 0.74%; the first time it was on the plus side since mid-April. However, the 40-stock Dow Jones Composite Internet index, which includes Yahoo!, reported that it gained 9.2% for that day, but it was still in the red 27.6% for the year.

As you look toward your investing strategy for the end of the year, continue to focus on the market leaders in this segment and don’t make the mistake of defining tech stocks, which include chip makers, computer box makers, and hardware and software resellers, as Net stocks.

For example, International Business Machines (NYSE: IBM) is an example of a mainstay that powers tech stocks across indices. The bullish response to the blue-chip’s second-quarter results on July 20 not only pushed up the Dow Jones industrial average 147.79 points to 10,843.87, but pulled the tech driven Nasdaq up 128.93 points, or 3.19% to 4,184.56. In short, look for quality stocks, Net-driven or not, that have consistent earnings and a solid business plan. (Another impact on that day of trading was favorable comments from the usually cautious Federal Reserve Chairman, Allan Greenspan, about an economic soft landing that the market interpreted as a cease-fire on the fight on inflation through interest rate hikes.)

Also, identify brick-and-mortar companies that have souped up operations and sales through new technology. But always brace yourself for price swings in

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