Internet stocks finally mount a rally

Internet stocks staged a decent rally Tuesday after absorbing a merciless pounding for the better part of the past two months. At this point, a likely interest-rate hike has been factored into these prices. So, is it time for another mercurial rise?

A quick scan of the most prominent Internet stocks shows a lot of green. Amazon.com Inc. (Nasdaq: AMZN) moved up 6 7/8, or 7 percent to 98 7/8 while America Online Inc. (NYSE: AOL) and Yahoo! Inc. (Nasdaq: YHOO) were up 6 3/16 and 9 1/8 a share, respectively.

Even eBay Inc. (Nasdaq: EBAY), which has been pummeled in the wake of its service outages, picked up 4 13/16 to 140 13/16.

"The fundamentals of these companies are still solid, there's just a lot of interest-rate fear out there," said Bruce Smith, an analyst at Jefferies & Co. "It's also a slow time of year in terms of Internet traffic, but people are ignoring the fact that these companies are seeing strong revenue growth despite this historically slow period."

Wall Street has accepted the fact that the Federal Reserve Board will raise short-term interest rates one-quarter of a percent later this month. Internet stocks trading at extraordinary valuations are especially vulnerable to any rise in interest rates.

But if the perception among investors is that one-quarter of a percent is enough to stymie the inflation threat, prepare for a huge Internet stock rally.

"Even if there's a sense the Fed might have to raise rates a full half-point, that could be a good thing," Smith said. "Once everyone knows what the expectations are, these stocks will heat up again."

Lost in the quagmire of interest-rate fears and plummeting stock prices is the fact that companies such as Yahoo!, Lycos Inc. (Nasdaq: LCOS) and Amazon.com are growing their sales in geometric proportions.

There's every reason to believe that once this quarter's earnings hit the Street, the love affair will recommence.

But that hasn't stopped some naysayers from warnings of further declines.

Morgan Stanley Dean Witter investment strategist Byron Wien told CNBC Tuesday that Internet stocks could take even steeper cuts.

"I don't think the stocks are going to zero but I do think they may be vulnerable to further correction," Wien told CNBC.

Harry Aloof, author of the Wall Street Trader's report, said investors shouldn't get too enthusiastic about Tuesday's Internet gains.

"The fact that they are up three or four points now means nothing," said Aloof, a technical analyst. "They need it on the close and they need seven or eight points."

But with AOL trading below $100 a share and leaders such as Amazon.com and Yahoo! trading 40 percent to 50 percent lower than their all-time highs, there's some great bargains to be had. "Right now, I love Yahoo!, Infoseek Corp. (Nasdaq: SEEK) and WorldGate Communications (Nasdaq: WGAT)," Smith said. "These are all great plays right now."