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Tech Industry

ANALYST WATCH: Looking for signs of life from &#039Net stocks

Investors are having a hard time remembering the last time Internet stocks as a whole made any significant and sustained gains. Short on confidence and catalysts, analysts say 'Net stocks will likely remain in hibernation for several months.

It's hard to believe that only two months ago, the Nasdaq was perched at an all-time high and leading Internet stocks were trading at twice what they're going for today.

But a combination of interest-rate hikes, general market volatility and a subtle but undeniable return to common sense investing has taken its toll.

No sector's been harder hit by this sudden interest in fundamentals than the Internet group.

Two months ago, these same stocks, the Yahoo!s, eBays and AOLs, were must-haves for any serious technology investor.

Nothing has changed within these companies. In fact, all three of these Internet bellwethers have delivered better-than-expected sales and earnings in the interim.

The truth is they're still must-haves for the long haul, but now that we're stranded in Wall Street's version of Death Valley, even the most ardent Internet proponents are looking over their shoulders.

Consider that Yahoo! (Nasdaq: YHOO), everyone's favorite pick, has fallen from a 52-week high of 250 1/16 in January to below 120 this week. America Online (NYSE: AOL), even after its landmark merger with Time Warner (NYSE: TWX) has fallen from 95 13/16 in December to around 50 this week. eBay (Nasdaq: EBAY) has slumped from 127 1/2 in March to around 65 this week.

And these are the pick of the litter.

Where have all the double-digit-percentage, single-day gains gone?

"Those days are probably over," said Doug Augenthaler, an analyst at CIBC World Markets. "Valuations for these stocks can get crazy and investors are starting to use some rationality in their approach to investing."

Thanks to a stinging correction for the entire market in the past six weeks, day traders, night traders and even long-term buy and hold traders are re-evaluating their infatuation with the 'Nets.

"People are starting to realize that picking a stock that's going to go up tomorrow doesn't work," Augenthaler said. "That's a loser's game."

And Internet startups, venture capitalists and investment houses are starting to learn that racing a money-losing .com to the market doesn't guarantee the riches that seemed so attainable just six or nine months ago.

Analysts say with few exceptions, we won't see a flood of Internet IPOs at least until the fall. In the meanwhile, investors can pick and choose from what's still a disparate buffet of stocks trading well below their 52-week highs.

"In the near term, there probably won't be any great gains in the sector," said Susan White, an analyst at J.P. Morgan. "It's hard to tell when this correction will end, especially with interest rates in question, but it's obvious that this period has been longer than previous pullbacks."

So what's it going to take to recharge these stocks?

"A good starting point would be a stabilization of the market," said Derek Brown, an analyst at WR Hambrecht & Co. "Once that's achieved, we need to see some significant upside surprises in some quarterly reports and an increase in merger activity."

But those catalysts aren't likely to occur through the traditionally slow summer months. Traffic slips while people are off sunning themselves and investors are generally content to wait for the pre-Christmas hype before jumping back in with both feet.

"I see continued volatility throughout the summer," White said. "I'd expect some recovery after Labor Day and through the holiday shopping season."

Meanwhile, analysts say investors should stick to the proven leaders, particularly AOL and Yahoo!, until the worm turns.

By and large, pundits advise investors to steer clear of so-called incubators such as CMGI (Nasdaq: CMGI) and Internet Capital Group (Nasdaq: ICGE), mainly because their success is largely tied to the stock performance of smaller Internet stocks.

They're not too hot on e-tailing stocks, either. They pay a steep price to attract customers and then lose them in a heartbeat. Plus, the market's been saturated by so many of these companies consumers have a difficult time differentiating between them.

"Eventually, we're going to find a place where a large group of people find appropriate valuations for these stocks," Augenthaler said. "Until then, Yahoo! and AOL are the giants here."