eToys, Amazon.com lead e-tailer rally

Prominent e-commerce stocks made strong gains Wednesday after Merrill Lynch's Henry Blodget lauded the prospects of eight companies that stand to make a killing during the Christmas shopping season.

Leading the charge was eToys Inc. (Nasdaq: ETYS) which shot up 5 7/8, or 15 percent, to 46 1/8.

In a research report, Blodget noted the Wall Street Journal reported the partnership formed between Toys 'R' Us and Benchmark Capital to set up toyrus.com has collapsed. While eToys does face competition from Amazon.com and KB Toys' KBkids.com, Blodget said its stock should take off in the company's third quarter.

Blodget also identified Yahoo! (Nasdaq: YHOO), America Online Inc. (NYSE: AOL), Excite@Home Corp. (Nasdaq: ATHM), Amazon.com Inc. (Nasdaq: AMZN), Barnesandnoble.com Inc. (Nasdaq: BNBN), Inktomi Corp. (Nasdaq: INKT) and Lycos Inc. (Nasdaq: LCOS) as attractive plays for the next two quarters.

"Although we are still marooned in August, Santa's sleigh ride is only five months away and this year, we think he'll be doing a lot of his shopping online," Blodget said in his research report. "With this in mind, we are introducing the 1999 Merrill Lynch Holiday Basket, a group of eight Internet stocks that we believe offer a sound way to play the fundamental strength and renewed investor enthusiasm we expect to see during the fall and holiday shopping season."

AOL shares moved up 3 7/8 to 101 3/8 while Amazon.com Inc. (AMZN) and Yahoo! surged 7 5/8 and 7 15/16 a share, respectively. Lycos added 3 11/16 to 46 and Inktomi shot up 4 1/16 to 120 1/16.

Since all of these stocks were hammered in the past two months, Wednesday's gains are understandable.

On Tuesday, Lycos topped analysts' sales and earnings estimates, providing yet another solid piece of news to this e-commerce rally.

With the market already discounted for a likely one-quarter percent boost in short-term interest rates, the stage is set for a strong holiday rally for leading Internet stocks.