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The holidays could gift wrap nice gains for investors

A surge in e-commerce could help the Internet stocks this quarter, but Y2K and a possible hike in interest rates loom in the background.

A surge in e-commerce is expected to be the dominant story for investors during the final quarter of the 20th century, tempered by fears of the Y2K bug and a possible hike in interest rates.

Last year, many Internet stocks--especially those with an e-commerce component--blasted higher as the holiday shopping season approached. While most analysts expect the same surge to occur this year, they do caution that worries lurk in the back of investors' minds about an interest rate hike and unforeseen Y2K glitches.

"Y2K and interest rates

Tech winners and losers
Of the 427 tech stocks tracked by CNET, these were the best and worst performers for the third quarter of those with market capitalizations of more than $100 million.
Company 9/30 price Q3 % change
Forte $9.69 183.87%
Infosys Technologies $143.00 146.55%
Flycast Communications $45.50 137.91%
Harmonic $130.81 127.75%
Voicestream $61.72 117.03%
Paging Network $1.03 -78.57% $12.25 -57.30%
Healtheon $37 -51.95%
Knight/Trimark $29.63 -51.43%
Ingram Micro $12.88 -50.00%
are secondary factors," said Phil Leigh, an equities analyst at Raymond James. "I really think what you'll see this holiday season is that e-commerce gains a lot of traction."

Indeed, online sales in November and December could climb to $6 billion, according to Internet research firm Jupiter Communications, compared with about $3.1 billion in 1998.

This year many analysts expect America Online,, and eBay to post some of the strongest gains. AOL dipped 5.4 percent in the third quarter. eBay also dropped 6.8 percent during the same period and Amazon gained 27.77 percent.

Analysts said that many Internet companies slipped recently because of normal seasonal stock market doldrums as investors took summer vacations.

"During the summer?companies were spending heavily in anticipation of the holiday season--everything negative was happening," said Abhishek Gami, an analyst at investment bank William Blair. "Now we are entering a period where these companies start to realize benefits from those investments, and sales are going to start coming through because of normal holiday seasonality."

AOL, and recently Amazon, have made it increasingly easier for smaller merchants to set up shop on their sites to partake in the holiday shopping season.

"AOL has such valuable real estate that as conventional merchants jump online, they want to put up their lemonade stands in the most visible places in cyberspace," said Leigh.

The Internet portals are another sector that is likely to be lifted by the e-commerce tide. Analysts noted that just as newspapers get a surge in holiday advertising, so will portals, which are largely considered media properties. Yahoo, Lycos, Alta Vista, and others may be the chief beneficiaries.

Interest rate and Y2K fears are likely to have a greater effect on the business-to-business sector, analysts said.

"The majority of consumer-oriented sites generate revenue in small bits--$20 here, $20 there," said Gami. "These are small purchases that are tied to core spending habits or utility habits of consumers."

Not out of the woods yet
More than Y2K, interest-rate-hike fears seem to be weighing heavily upon stocks as the Federal Reserve gets set to meet next week to decide whether another increase is warranted.

"[Stocks] aren't out the woods yet, and we still need to be very aware of the [interest rate] issue," said Gami. "If it were to flare up again, we certainly will see another round of weakness in the Internets."

Other analysts are cautious for a different reason. "There is some nervousness out there that we may be at the end of the bull market or might have already seen the end of the bull market, which is making investors even more jittery," said Peter Coolidge, managing director of equity trading at Brean Murray.