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Merrill Lynch's Blodget snubs a handful of Net stocks

Influential analyst Henry Blodget downgrades several Net stocks in an effort to differentiate the sinkers from the floaters.

Influential Merrill Lynch analyst Henry Blodget downgraded an array of Net stocks today in an effort to differentiate the sinkers from the floaters.

Blodget's downgrades include 24/7 Media, Barnesandnoble.com, Buy.com, DoubleClick, eBay, eToys, iVillage, Pets.com, Quokka Sports, Safeguard Scientifics and Webvan.

Many of these stocks have hit hard times since the severe market downturn this year, and Blodget's downgrades were issued to reflect the reality of how Internet stocks are performing, according to a statement issued today.

Last month, for example, shares of ad network DoubleClick fell 12 percent on fears of a revenue slowdown related to a reduction in Internet ad spending. In addition, online grocer Webvan disappointed Wall Street last month when it reported lower-than-expected earnings for the second quarter.

Blodget continues to be optimistic about America Online, FreeMarkets, Homestore.com, InfoSpace, Inktomi, MyPoints.com and Yahoo, which all have "buy" ratings.

Blodget, a longtime Internet bull, noted in his report that the sector is going through a transition phase from "hypergrowth to long-term growth." Amid this transition, capital is drying up, Net stock picks are becoming more centered on traditional factors such as valuation and analysis, and overall growth in the market is beginning to leave some companies behind.

Despite the downgrades, Blodget said that many of these companies may be near seasonal bottoms, presenting a good buying opportunity. However, he warned that "sector volatility will continue."

Blodget's downgrades would appear to be a case of too little too late, considering that the shares of many of the companies have been depressed for months.

But issuing a downgrade is a riskier proposition for an analyst than an upgrade, said Bruce Lupatkin, a former Hambrecht & Quist research director who now runs technology hedge fund North Bay Technology Partners.

"No one is happy when you do a downgrade. The company isn't happy. The underwriting firm isn't happy. And the guys who own the stock aren't happy. The only ones who may be happy are those who shorted the stock," Lupatkin said. "If you're wrong, you can use a lot of credibility. But if you do an upgrade and you're one of the pack, there's no personal risk."

Indeed, analysts' reputations are partly built on the accuracy and speed of their recommendations and earnings estimates.

In Blodget's case, the ratings cuts come at a time when some stocks have been in a slump for several quarters.

Barnesandnoble.com, see story: An Amazon bull pulls backfor example, has posted a steady decline since last September, when it was trading around $25. Blodget today lowered his recommendation to a "near-term neutral" from "near-term accumulate," as the stock trades at a fraction of its value last fall.

Shares in Barnesandnoble.com, however, rose nearly 40 percent in late trading today to $5.19, after it struck a deal with Microsoft to create an online store to sell digital books.

Meanwhile, shares in e-tailer Buy.com have been stagnant since April, remaining mired in the $3 to $4 range. At the beginning of the year, the shares hovered around $30.

Amazon.com, which put Blodget on the map of market-moving analysts in 1998 when he gave a 12-month price target of $400, is another company he recently downgraded.

Blodget lowered the online giant last month to a "near-term accumulate" from a "near-term buy"--a move that comes after the stock has fallen roughly 70 percent from its 52-week high of $113 last winter.