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ANALYST WATCH: Praying for a bottom in Internet sector

The downward spiral of Internet stocks has tested the will of analysts who are stuck in no man's land right now. To their credit, they're sticking with their calls even as some of their prized picks have lost half their value in two months.

When an analyst has a "buy" recommendation on a stock at $140 a share, it's all but impossible to lower the rating once the stocks falls to $100 a share. And it's even more difficult to do it when the stock falls to $80 a share.

The carnage among leading Internet stocks has been astounding. Amazon.com Inc. (Nasdaq: AMZN) is trading near $93 a share after peaking at $221 in April. America Online Inc. (NYSE: AOL) is hovering around $80, down from $175, and CMGi Inc. (Nasdaq: CMGI) has plummeted from $165 to $78.

These stocks have fallen so fast that some analysts have felt compelled to issue research reports almost on a daily basis, telling investors that the decline in a particular stock is no reason to panic.

Fighting the slump at light speed

Phil Leigh, an analyst at Raymond James, issued two of those reports this week. One for CMGi and another for AOL.

"Although CMGi's stock price was down about 8% (Tuesday), we continue to believe that the shares are attractive for accumulation," Leigh said in a report. "While CMGi shares may always witness amplified price movements in response to fluctuating IPO market conditions, we remain of the opinion that CMGi is perhaps the best single investment vehicle for participating in the outstanding secular growth potential of the Internet."

Internet investors made unfathomable gains overnight as these stocks. Now they're losing ground just quickly. That's what makes calling the bottom so difficult.

"Everything about the Internet happens at warp speed," said Derek Brown, an analyst at Volpe Brown Whelan & Co. "But there's little that I can point to in fundamental changes in these companies. Interest rates have people concerned and a lack of important news is taking these stocks down rather than sideways."

Even the white-hot Internet IPO market has cooled. This week several Internet IPOs floundered in their debuts.

But of even more concern is the plight of the Internet leaders, the stocks some refer to as Net bellwethers.

AOL, which took some more abuse this week on reports that Microsoft Corp. (Nasdaq: MSFT) might offer free Internet service, has been the most disappointing Internet stock of all.

Paul Noglows, an analyst at Hambrecht & Quist, contends AOL will overcome these short-term obstacles and re-establish its dominance on Wall Street.

"AOL has shown time and time again an uncanny ability to adapt and change to market conditions," Noglows said. "There's no reason to think that will change."

In response to the deteriorating stock price, Leigh sent another hastily crafted research report, warning investors not to give up on AOL just yet.

"We believe the drop in AOL's stock price is too extreme," Leigh said in the report. "When the dust settles, both AOL and Microsoft want to be in a place where they can (monetize the audience). If getting there requires AOL to lower rates in a competitive response, then it may well do so."

There's no guarantee these stocks will ever make it back to the incredible prices they were trading at in April, but if you're already holding the stocks, why wouldn't you wait and see?

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