NEW YORK — Internet stocks offer a remarkable exception to the "big cap is better" approach.
Click on Broadcast.com, for example. The stock price for this online news provider tripled in value on its first day of trading last week.
How about Yahoo! - literally. The most popular Web-search engine boasts a stock price near $200 a share, off a low near $21 over the last 12 months.
Share prices for online bookstore Amazon.com, America Online, plus Net stocks CNET, CMG Information Services, and EarthLink have all shot skyward.
The main Internet stock index, the ISDEX, is up more than 70 percent this year, compared with a 22 percent gain in the overall market.
But before you get blinded by Internet fireworks, analysts urge caution, lest you also get burned.
Many analysts describe Internet stocks as speculative "froth."
"Net stock valuations are up because interest rates are low," says technology analyst Stephen Dalton of First Capital Group, Philadelphia. Reverse that proposition, and look out!
Most Net companies, such as Amazon.com, actually lose money. Yet their stocks continue to climb, fueled by three forces:
* Expectations that Internet use will grow exponentially.
* A search by mutual and pension funds for smaller stocks with rising prices. They've converged on Internet stocks.
* Speculation that large media companies will gobble them up.
If you want to dabble in these stocks, experts suggest no more than a fraction of your portfolio - perhaps 1 percent at most.
Three major mutual funds focus on Net firms (see chart, below), but many technology funds hold Net stocks. (Check out Northern Technology up 42 percent this year; PIMCO Innovation, up 49 percent; Flag Investors Communications, up 42 percent.)
But remember that fundamentals - basic business performance - aren't in sync, Mr. Dalton. says.
Nonetheless, "once you overlook a serious evaluation [problem] among these companies, I don't think there's been any new sector in the past half century that has as much positive momentum," argues analyst Henry Blodget of CIBC Oppenheimer.
He likes AOL, Yahoo!, and Amazon.com, but adds that small investors will probably feel comfortable with a good mutual fund.
Keith Benjamin, a Net analyst with Robertson Stephens mutual fund company, agrees and sees Net-oriented funds as a long-range investment. He also favors CNET, E-Trade, Excite, and NewEdge (check out his views at www.internetstocks.com).
There's not much choice when it comes to investing in Internet
funds. While analysts view this industry as having great growth potential,
it's extremely speculative.
Fund ------- Total return ------
year-to-date one year
Internet Fund 108.0% 137.0%
Munder Net Net Fund 45.3 87.2
WWW Internet 23.5 16.0
Source: Funds themselves; year-to-date data as of July 21; one year return as of June 30.