has yet to turn a profit, but has seen a 55-times increase in share price since its 1997 initial public offering. P/E ratios can climb into the hundreds or move off the scale. For example, Bendele owns Cisco Systems, an Internet infrastructure company with a P/E of 174, which would have been unheard of in his days of tutelage under his former broker, John Rogers.
Instead, look at revenue growth. Is the company increasing the money it brings in each year? According to Steven Singleton, director of research and portfolio management at Robert Van Securities, an Oakland, California-based investment advisory firm, “If you’re looking for stocks that should be winners, look for top-line growth-acceleration in revenues. Typically, these companies won’t and shouldn’t show a profit, because they will be reinvesting in their business and using currency to acquire complementary companies.”
What to do once the Internet company has become more established? The real key is finding companies that have sustainable earnings growth once they pass the important benchmark of creating a solid consumer base and brand name.
Go for the Internet blue chips. Yes, even the new-kid-on-the-block Internet has its blue chips. You know the ones-those companies you wish you had gotten in on the ground floor, such as Microsoft, (which was recently added to the Dow Jones Industrial Average and is simultaneously part of the Nasdaq Composite index) Yahoo! and Intel. Usually these companies have a recognizable brand name, a track history of earnings and a proven business plan. And while there may be less risk involved, you still have
to research the fundamentals.
Become Internet savvy. It’s the Warren Buffett way-invest in what you know. “When you buy a stock, you invest in the people running the company and their ability to take the company to another level,” says Timmons. Her advice? First look at the dotcoms that you use. “It may not be glamorous, but if you use AOL as your Internet provider, then perhaps you should have stock in AOL, or if you buy a great portion of your books from Amazon.com, you may want to consider that company.”
With Internet stocks singing their siren songs, many investors are forgetting the more mundane sectors, such as utilities, retail and real estate. Don’t. Remember the investing rule of thumb: as far as a stock can go up is also as far as it can go down.
So play it safe. Bendele, for example, allots only 10% of his portfolio to the Internet’s more speculative stocks. This way he’s in on the game, but he doesn’t lose sleep. He also finds other ways to invest in the Internet-for example, through support stocks like Cisco Systems (Nasdaq: CSCO), which produces network equipment and Web software. Here’s a good thing about the Internet: you’ll find lots of opportunity for creative diversity, so try the following:
Invest in Internet support stocks. In addition to Cisco, Bendele also invests in EMC Corp. (NYSE: EMC), the world’s largest computer data-storage company. Singleton subscribes to a similar method. “The way