Why are Net stocks deflating?

The stock market has been busy shedding points in recent weeks, dragging down Internet stocks along the way.

Usually an unflappable group, Net stocks have slumped since the broader market took a turn for the worse last month on increased concerns about Asian economies and cautionary tones from Federal Reserve chairman Alan Greenspan. Both the Dow Jones Industrial Average and the tech-heavy Nasdaq are trading at about six-week lows. (See related story)

"During the April and May decline, a lot of Internet stocks would run counter to the market, and it was hard to dampen speculation at all," said David Simons, managing director at Digital Video Investments, an institutional investing firm. "Now the character has changed, and you're not seeing stocks bounce up on good news."

Case in point: America Online yesterday announced a deal with Netscape to collaborate on several online city guides. (See related story)

"Normally, something like that would be good for a 2 percent or 3 percent bump, but [yesterday] it didn't happen," Simons said.

Instead, AOL finished yesterday down about 1 percent at 116, and Netscape closed down more than 5 percent at 27.0625.

Net directory Yahoo closed at 86.4375 yesterday, down nearly 5 percent, and Internet service provider MindSpring shaved more than 4 percent to close at 39.

They were among the luckier of the Net issues.

DoubleClick, for example, was off nearly 15 percent yesterday, while music retailer CDnow closed down 13 percent.

Search engines Excite and Infoseek were down more than 7 percent and more than 6 percent, respectively.

Only weeks ago, many of these Internet bellwethers, including Yahoo and AOL, were trading at or near their 52-week highs. So what happened?

"It took a good week before the Internet stocks really started to react to the down market," Simons said. "At first these types of speculative stocks are slow to react, but with protracted declines they tend more and more to react far worse than the general market."

Simons said there hasn't been any bad news in the Internet arena to spark a decline. Instead, he said, retail investors and day traders begin to start thinking about preserving profits.

On news of acquisitions by Amazon and Lycos, and in anticipation of strong earnings by America Online, some Net stocks got some relief today.

Lycos and Amazon were up in midday trading, as was Excite. ISPs MindSpring Enterprises and EarthLink also showed solid gains today.

Indeed, some say that the Internet sector is as strong now as ever and that the recent decline is to be expected.

Keith Benjamin, an Internet analyst for BancAmerica Robertson Stephens, said he is not concerned about the recent downturn in Internet stocks and maintains a "buy" rating on many of them.

"This is an almost identical pattern to what we've seen before. Last year, these stocks were down about 20 percent after earnings season," he said, noting that the Internet segment generally has been down about 15 percent during the last week.

Benjamin attributes some of the recent losses to "rational profit taking," adding: "I think the market needed a break. This is August. You and I should be out working on our tans, not working in front of a computer."