Use caution on Internet stocks

The Internet is here to stay and many think its social and economic impact is comparable to the Industrial Revolution. Interest in Inter-net stocks borders on a buying frenzy akin to the Gold Rush of 1849, when normally sensible people dropped everything to chase gold with reckless abandon. In the Internet rush of 1999, normally sensible investors abandoned tried-and-true approaches in the hopes of "hitting the big one" with an Internet stock.

That frenzy created market valuations for many Internet stocks that were astronomical by traditional measures - and consequently very risky. Companies with a few million dollars in sales and years away from showing a profit (if ever) in some cases sold for valuations comparable to blue chip companies with billions in revenues and earnings.

Too many dollars were chasing too few stocks. When 30 or 40 multibillion-dollar mutual funds buy or sell shares in relatively few Internet companies, the price gyrations can be dramatic. This results in tremendous volatility, as apparent in last year's daily price movement of individual Internet stocks.

Internet-related companies generally comprise three tiers, each with different levels of risk. At the first and least speculative tier are established companies with proven management teams and long-term track records that supply the hardware and software infrastructure components needed for the Internet to function. These firms tend to be more diversified and are not totally dependent on the Internet for their success.

Companies that are a "pure play" comprise the second tier. These are in the early stages of their corporate life cycle and not expected to be profitable for some time. For each winner in this group there will be many losers.

The third tier is comprised of companies that are "Internet wannabees." These are the most risky, as they have jumped on the Internet bandwagon to try to jump-start an otherwise ailing business. In some cases, the Internet might be a company's salvation, but it's unlikely to cure problems resulting from fundamentally poor management.

Traditional buy-and-hold investors who wish to participate in the growth of the Internet are well-advised to seek established companies in the first tier - those not solely dependent on the Internet for growth, but benefiting from it. These companies resemble the "niners" merchants who sold pickaxes, shovels and pans to the eager prospectors in 1849.

Pay attention to traditional, healthy companies that use the Internet as an additional channel to deliver products. The Internet does let such firms offer convenience, speed and pricing that can contribute to their core growth.

The Internet is here to stay, and investing in it will be around for a long time. Cautious investors needn't feel compelled to act immediately or risk missing the boat. In light of current valuations and continued volatility of the stocks, patience may be the most important trait investors bring to their Internet investing.

(Betty J. Neal, CFP, is an investment representative with Edward Jones in Springfield.}