Internet mutual funds faltered during the second quarter, stirring debate over whether the blazing sector is just flickering or running out of speculative fuel.
The American Stock Exchange Internet Index plunged more than 30 percent in just six weeks ending in mid-June before partially recovering by the end of the quarter.
Internet mutual funds still wound up midyear far higher than where they began in 1999. But the setback prompted some experts to wonder whether the sector's speculative exuberance is giving way to sober, conventional ways of measuring stock values.
"The recent falloff in Internet stocks could be just a taste of what lies ahead," says Sung Won Sohn, chief economic officer at Wells Fargo in Minneapolis.
Even with the recent correction, leading Internet stocks sell well beyond commonly accepted price levels based on earnings.
For example, Yahoo! Inc. now sells far below its early April high. But its current share price of about $178 is 1,100 times estimated earnings. Meanwhile, stocks in the Standard & Poor's 500 Index average 24 times earnings estimates.
The Milky Way prices of Internet stocks make them especially vulnerable to fears of interest-rate hikes. Such anxieties were a leading reason the sector floundered last quarter, say some equity analysts.
But others believe the correction is over. "Near term we expect Internet stocks to trend upward," in expectation of good earnings reports in the second quarter, says Alexander Cheung, manager of the Monument Internet Fund.
Moreover, Mr. Cheung says rising interest rates would not harm Web stocks. Most firms, he argues, have ample cash from recent equity offerings or venture capital and very few of them rely on the bond market.
"For Internet stocks in general, [higher rates] would have no impact at all," Cheung says.
The recent Internet-stock stumble belies the popular notion that the equities are the bellwether for the Wall Street's leading sector - technology. Cyberspace stocks fell more than other tech stocks and have struggled to recover.
Moreover, the declining appeal of initial public offerings (IPOs) in Internet stocks suggests that cooler-headed investors might crimp the stocks' accustomed role as the vanguard for the broader market.
Last month, one of the busiest ever for IPOs, the price of some new "dot com" stocks plunged on their launch day. In previous months, most new offerings with even a whiff of cyberspace rocketed.
"The Internet is not a bellwether," says Sam Stovall, sector analyst at Standard & Poor's in New York. Instead, "these stocks are headline stocks because they move so dramatically," he says.
After soaring in 1998 and the first three months of this year, Internet mutual funds sputtered in the second quarter. Even so, these funds are still far better off now than at the beginning of the year.
TOTAL RETURN FUND NAME 2ND QTR. YTD INTERNET FUND 10.4% 113.0% 888-386-3999
WWW INTERNET 5.5 42.4 888-263-2204
MONUMENT INTERNET 3.9 99.2 888-420-9950
MUNDER NETNET A 3.1 58.9 800-438-5789
WHITNEY DODDS WOODRUFF - STAFF