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The Week Ahead: Have Net stocks hit bottom?

Tech Industry

The recent correction in Internet stocks has Wall Street analysts getting whiplash trying to call the bottom of the slide. Despite Friday's gains look for more skittishness in the week ahead.

The week started with a negative Barron's article entitled "Amazon.bomb." The points in the article included the assertion that Amazon is just a middleman, is threatened by digital delivery of books and music, looks like a bricks-and-mortar retailer and loses tons of cash. Nothing in that article was terribly new, but it was a scathing -- not to mention entertaining -- read.

With that shaky start, Amazon lost a little more ground this week.

"We continue to expect to see near-term weakness in the stock," said Merrill Lynch analyst Henry Blodget. "We expect a modest rally in late June followed by renewed weakness throughout the summer. We then expect the stock to have a strong Q4."

Amazon wasn't the only lagging stock. Other Internet "blue chips" such as America Online Inc. (NYSE: AOL, chart) and Yahoo! Inc. (Nasdaq: YHOO, chart) had a shaky week before Friday's rally.

But the rally may be short. Factor in ongoing interest rate concerns and you have yet another week of Wall Street wondering "What's wrong with the Internet stocks?"

Analysts are driving themselves silly trying to call the end of the Internet slide. Last week, it was Morgan Stanley's Mary Meeker, who was calling for more of a haircut, vs. BancBoston Robertson Stephens Keith Benjamin, who was calling for a rebound. This week, Benjamin was sticking to his story.

"We see the psychology turning with bottoms being tested now," wrote Benjamin in a research note. " We believe it is critical to remain disciplined during this test."

Benjamin, however, noted that "the stocks in our coverage group declined another 5 percent to 10 percent on average this week."

Needham & Co. analyst Dalton Chandler said things were choppy, but he expected Internet stocks to get "some footing" in upcoming weeks as the Federal Reserve makes its decision on interest rates. Chandler cited the usual suspects for the current slide: interest rate fears, slower growth for large cap Internet companies, summer doldrums and lack of news before the earnings season.

In fact, we've seen similar behavior in Net stocks before. Last summer was no picnic. But analysts are getting worried. Notice this week's latest dose of advice from Blodget.

"The recent pullback in the internet sector has been deeper and more prolonged than most to date," said Blodget. "These stocks are extremely expensive and wildly volatile and they have no near-term valuation "floors." This means that the leaders could easily pull back another 50% or more from current levels (we don't think they will, but it is clearly possible) and the laggards much more."

Of course the best advice this week concerning the folly of trying to call the bottom of an Internet came from a buysider. Alex Cheung, portfolio manager for the Monument Internet Fund, said so-called "speculative bubbles" come and go in any new industry. The Internet is no different.

Cheung added that investors should buy into Net stocks with a three to five year horizon and give up on the chronic stock watching. "Don't check your stock prices every hour of every day," he said.

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