It's taken a while, but finally the Internet sector is starting to show signs of life. After better-than-expected news from the Fed, analysts are now gearing up for a flurry of second quarter earnings that could send these volatile issues back into overdrive.
After each of the Fed's three interest-rate cuts in 1998, Internet stocks went nuts. With so many of these companies losing money at a staggering pace, it was nice to have slightly lower interest rates.
This time, the Fed raised rates by 25 basis points but adopted a "neutral" bias. In the minds of some Internet investors this was almost as good as a rate cut. Maybe even better.
"The market had already factored in the quarter-point increase," said David Levy, an analyst ING Barings Furman Selz. "Internet stocks, generally, were hit harder than the rest of the market. There was talk of this increase being the first in a series. But it doesn't look like that's going to happen."
By moving to a "neutral" bias, the Fed gave Internet investors a second wind. The quarter-point increase isn't good, but the outlook has changed. More than anything, people know what to expect for the rest of the year.
Looking at the gains made by the likes of Yahoo! Inc. (Nasdaq: YHOO) and Lycos Inc. (Nasdaq: LCOS) this week, it's obvious these stocks still have plenty of room to grow. Yahoo!'s second quarter earnings next week might be the first in a series of catalysts.
"We are relieved and encouraged by signs of selected strength in some of our favored Internet stocks," said Keith Benjamin, an analyst at BancBoston Robertson Stephens, in a research report. "With reporting season kicking off next (week) when Yahoo! reports, we expect evidence of improving fundamentals and further stock progress."
Benjamin said he expects the volatility to taper off, with few stocks surging to their highs or falling to new lows.
He recommends stocks that haven't enjoyed a true recovery yet or that have been lost in all the wheeling and dealing of late. Mapquest.com Inc. (Nasdaq: MQST), Lycos and Ticketmaster-CitySearch Online Inc. (Nasdaq: TMCS).
"There are a few stocks that stand out as ripe for positive attention over the next few weeks, by our analysis," Benjamin said. "We believe TMCS is now the prime beneficiary of increasing commerce at the local level, with more stores joining the CitySearch network to reach its audience and with more people visiting for tickets and more."
Ticketmaster-Citysearch shares were trading around 29 Friday after soaring to a 52-week high of 80 ? in April. Three of the four analysts following the stock rate it either a "buy" or "strong buy."
"TMCS appears to be experiencing accelerating growth while its stock price has been lagging," Benjamin said. "We believe our estimates for both ticket sales and CityGuide revenues are significantly low."
First Call consensus expects Ticketmaster-Citysearch to lose 34 cents a share in its second quarter and $1.43 a share in the fiscal year.