Profiting From the Internet's Rise

Risks and Rewards

The Internet may be the hottest growth industry of the 1990s.

Cyberspace has become the place to do everything from making investments to keeping in touch with friends.

So instead of just investing over the Net, should you be investing in it?

Not necessarily, analysts say. There are opportunities, but caution is as warranted in cyberspace as in any realm of investment.

"The Internet is a wonderful new area" for communication, but "there's no need to check your brains at the door" when you invest in it, says Michael Murphy, editor of the California Technology Stock Newsletter, published in Half Moon Bay, Calif.

The popularity of Internet stocks, coupled with volatile earnings, put them in the doghouse until early this year, says David Sterman, who tracks technology stocks at Individual Investor magazine.

But now, the Internet universe has settled down somewhat, and a few investments look interesting, Mr. Sterman says.

For mutual fund investors, he says the way to play the Net is a good, diversified technology fund - which may include some of the Internet-linked stocks mentioned below.

At present, no fund invests solely in the Internet, and even if one did that focus is probably too narrow for the average small investor, Sterman says.

Some technology funds that win high marks from the Morningstar rating service include Invesco Strategic Technology (800-525-8085), T. Rowe Price Science & Technology (800-638-5660), and Seligman Communications & Information A (800-221-2783).

To weave your financial fortunes more closely to the Web, consider some individual stocks.

"Look for companies and individuals actually making money," Murphy says. Once you identify them, he says, only buy into a stock if the firm passes standard tests of value. One example is the price-earnings ratio, a company's share price divided by its earnings per share. Some analysts look for a p/e that's lower than the annual rate of earnings growth.

Internet-linked companies tend to be small and trade on the Nasdaq market. Most investment houses rate them high risk.

Everen Securities has positive ratings on two of the best-known Internet companies, America Online (AOL), an online-access service, and (AMZN), an online bookstore. But Everen calls both stocks risky.

Net-related companies fall into three categories, experts say:

* Hardware companies building out the Internet. Cisco (CSCO), 3Com (COMS) and Ascend (ASND) are three examples. Stock prices are high relative to company fundamentals such as earnings, Murphy says.

Still, Stephen Koffler, an analyst at Donaldson, Lufkin & Jenrette, believes the networking group will outperform the broader market as Internet demand grows.

* Software firms. Yahoo (YHOO) and Netscape (NCSCP) make software that helps people navigate the Web. But many firms, while innovative, are struggling to establish a viable business structure, Murphy says.

* Content firms. This group includes, and E*Trade (EGRP), an online brokerage service. These companies sell goods and services through the Net. Again, these stocks look overpriced, says Murphy. But they have the most promise of steady profits.

Murphy believes investors should choose firms with much of their operations outside the Internet. He likes Adobe Systems (ADBE) and Macromedia (MACR).

Adobe is a big softwaremaker and a major player in desktop publishing.

Macromedia is a leading supplier of multimedia software.

Sterman, too, looks for companies with deep pockets and ventures beyond the Internet. He likes CMG Infoservices (CMGI), which provides seed money to small Internet-linked companies.

"And don't forget WorldCom [WCOM], which has an Internet presence," he says.

The fast-growing phone company has a deal to buy MCI Communications (MCIC), a huge player in the fiber-optic "backbone" that carries Internet traffic. WorldCom itself is wired to Internet business, and its megadollar purchase of MCI signals the Net emergence into the mainstream.

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