ANALYST WATCH: Stage set for 'Net stock resurgence

3 min read

Short-term interest rates are going to jump one-quarter of a percent next week, according to just about everyone on Wall Street. Despite this virtually certainty, Internet stocks are finally regaining some of their luster.

Obviously, higher interest rates dampen spirits on Wall Street. But those companies trading at ridiculous price-to-earnings ratios (if they even have earnings) are especially hard hit. How can you invest in a company that doesn't expect to turn a profit for a year or two when interest rates headed north?

Investors want to buy the next Yahoo! Inc. (Nasdaq: YHOO) or eBay Inc. (Nasdaq: EBAY) but they're not inclined to speculate as much when the cost to borrow money for everything from homes to credit cards is on the rise.

Saying that, Internet stocks got a nice boost this week after Merrill Lynch's Henry Blodget came out with a couple of upgrades and selected a basket of eight Internet stocks that he believes offer considerable value to investors.

Blodget advised his clients to buy some of the leaders such as Amazon.com Inc. (Nasdaq: AMZN) and America Online Inc. (NYSE: AOL) as well as some second-tier e-tailing stocks such as eToys Inc. (Nasdaq: ETYS) and Barnesandnoble.com Inc. (Nasdaq: BNBN).

The Internet sector was also buoyed by strong earnings from Lycos Inc. (Nasdaq: LCOS), which turned a slight profit in its fourth quarter.

"There is a lot of pent-up demand to buy stocks," said Conley Turner, an analyst at Wall Street Strategies. "Lycos definitely adds some fuel to this fire."

Analysts were also encouraged by the number of new Internet users logging on during the slowest time of the year.

According to Media Metrix, total U.S. web users climbed more than 250,000 from 62.7 million in June to 62.9 million in July. AOL held down the top spot with 67 percent reach while Yahoo! and Microsoft Corp. (Nasdaq: MSFT) sites checked in at second and third place, respectively. Lycos remained in the No. 4 spot with 48 percent reach.

"We believe there is a lot of money waiting to buy these stocks, but wavering after this year's volatility," said Keith Benjamin, an analyst at BancBoston Robertson Stephens. "We will see a rush to buy within the next few weeks, just as we saw around this time last year."

Analysts love Dell again

Dell Computer Corp.'s (Nasdaq: DELL) strong second-quarter earnings compelled several analysts to upgrade the stock.

In the quarter, Dell raked in $507 million, or 19 cents a share, on sales of $6.14 billion.

First Call consensus expected it to make 17 cents a share.

With its sales improving 42 percent versus the year-ago quarter, Dell regained confidence from the investment community.

Deutsche Banc Alex. Brown raised it from a "buy" to a "strong buy" while both Salomon Smith Barney and Warburg Dillon Read bumped it from a "neutral" rating to a "buy."

Hambreacht & Quist upgraded it from "market perform" to "buy" and BancBoston Robertson Stephens knocked it up to a long-term "attractive" rating from "buy." "Given that only 16 percent of its total revenue is enterprise related, Dell's Y2K risk is somewhat limited relative to the big systems vendors," said Dan Niles, an analyst at BancBoston Robertson Stephens.

Twenty-five of the 32 analysts following the stock rate it either a "buy" or "strong buy."

Dell shares closed near $43 a share Friday.