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Analyst Watch: Experts see Internet recovery coming

Judging when a market or a certain sector has hit rock bottom is a tricky business. But after weeks of bloodletting some analysts are confident that now's the time to buy not only proven Internet leaders but some of the emerging players.

Internet stocks were tagged again this week and might take yet another round of beatings in the early part of next week. With mixed economic data filtering out and the Fed's recent tightening bias established, it's no surprise that Internet stocks have taken the worst of it.

With as many as a half dozen new Internet IPOs hitting the Street each week, there's simply too much supply for such a rotten macroeconomic climate.

However, since peaking above 2,650 in late April, the Nasdaq composite has only lost about 8 percent of its value. In that same period, Internet indices from major brokerage firms and investment houses have plummeted anywhere from 20 percent to 35 percent depending on the particular index.

While most Internet analysts feel the worst is behind the sector, Morgan Stanley Dean Witter's Mary Meeker thinks the sector could lose another 20 percent before beginning its rehabilitation.

"It isn't uncommon this time of year for prices of tech stocks to contract when catalysts are insufficient," Meeker said in a research report.

Morgan Stanley Dean Witter's Internet index is off 33 percent from its recent high set in April and Meeker thinks it will fall another 20 percent in the next couple of weeks.

Other Internet analysts disagree.

"In our view, many investors appear to have given up after recent declines, demonstrating capitulation that typically defines the bottom," said Keith Benjamin, an analyst at BancBoston Robertson Stephens. "While it is almost impossible to pinpoint the exact day of defeat, we believe we are close enough to start to be more aggressive accumulating a broader range of stocks than we have been focused on over the last month or so."

Some analysts are hedging a bit.

"We believe the sector could stay choppy during the summer, as some seasonal usage trends could start affecting the industry," said Jim Preissler, an analyst at PaineWebber. "As the summer winds down and users and company managements return home from vacations, we expect usage and news flow from companies to pick up and stock prices could follow."

Benjamin and Co. still like the leaders such as Yahoo! Inc. (Nasdaq: YHOO), America Online Inc. (NYSE: AOL) and Inc. (Nasdaq: AMZN), but he's also recommending second-tier players such as Inc. (Nasdaq: INSP), Digital River Inc. (Nasdaq: DRIV) and SportsLine USA Inc. (Nasdaq: SPLN).

"We expect June quarter results will exceed expectations at least as much as we saw in the March quarter and expect the next reporting season will be a positive catalyst for the group," Benjamin said. "We are hoping for greater differentiation on the rebound between the big and small franchises. With so many recent IPOs, we believe it takes time for investors to appreciate new stocks."

BancBoston Robertson Stephens NETDEX index fell 8.4 percent in less than a week and is down 26.5 percent from its 52-week high of 1,148.55.

If you were to select one leader to get your feet wet, Benjamin says Lycos Inc. (Nasdaq: LCOS) would be a good bet.

"We believe there is potential for upside as LCOS continues to translate its growing reach into revenue," he said. :We have been encouraged by the favorable reaction that LCOS stock has shown from both the merger termination, subsequent partnership with Ticketmaster-Citysearch Online Inc. (Nasdaq: TMCS) and Q3 earnings results."

Other stocks worth a look: Network Solutions Inc. (Nasdaq: NSOL), which is down more than 47 percent from the $110 a share it was trading at in April. Inc. (Nasdaq: PCLN), which BBRS's Lauren Cooks Levitan calls "etailing's emerging franchise," has lost more than $50 a share in the past two weeks.

Chip stocks are too cheap

Intel at $50 a share? Hard to believe, but it's almost true. Shares of the undisputed heavyweight champion of semiconductors have fallen into their annual slump and that could be good news for investors tired of paying $200 a share for Internet stocks.

Piper Jaffray's Ashok Kumar likes Intel (Nasdaq: INTC) right now, but he's holding out hope that it will fall below $50 a share.

"We continue to like Intel on both a secular and relative valuation basis," Kumar said in a research report. "The stock has broken key support at $55 and may retrace itself back to $47 level. If so, it would offer a great opportunity to get back into this marquee name."

Intel's rated a "buy" or "strong buy" by 31 of the 28 analysts covering it.

If you're looking for another relatively cheap chip stock, you might consider LSI Logic Corp. (NYSE: LSI). Quietly, this specialty chipmaker has nearly quadrupled since bottoming out around $10 a share in October.

More encouraging, Donaldson, Lufkin & Jenrette bumped it from a "market perform" rating to "buy" this week even though it recently hit a 52-week high of 40 15/16.

Eleven of the 19 analysts following LSI rate it either a "buy" or "strong buy."