Investors warned to beware of bargain-bin e-tail stocks

Forget about fiber optics, wireless or Net infrastructure stocks: The hottest returns for the past couple of days have been in the e-commerce sector.

4 min read
Forget about fiber optics, wireless or Net infrastructure stocks: The hottest returns for the past couple of days have been in the e-commerce sector.

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On-time delivery: E-tailers under the gun this holiday season
Scott Silverman, VP, Internet retailing, National Retail Federation

When the starting gun sounded on the traditional start of the holiday shopping season last Friday, investors also began snapping up shares of downtrodden e-commerce companies. In many cases, the shares have posted double-digit two-day gains.

But analysts warn buyers to think twice before plucking any of these stocks out of the bargain bin with the aim of turning a quick profit.

"We've seen these rallies before," said Dan Ries, a financial analyst with C.E. Unterberg Towbin. "I'd be surprised if it survived even through the end of the day."

Maybe so, but many investors have been willing to take the plunge, stocking up on shares that sell for the price of a candy cane or two.

Investors who plunked $1,000 into Tickets.com last Wednesday, for example, could have sold that same stake Monday for about $1,750, as the shares jumped from 43 cents to 75 cents.

The story is the same across the sector. An investment of $1,000 into eToys early Friday would now be worth $1,650, as the shares have jumped from $1.21 to $2.

Other small-cap e-tailers enjoying a holiday boost included Buy.com, up 12 percent Monday to $1.37 after gaining 25 percent Friday, and Barnes&Noble.com, which was up about 7 percent Monday after gaining 12 percent Friday.

Several other large online retail stocks gained ground Monday as well, extending Friday's gains, which were sparked by optimism about the holiday shopping season.

In midday trading Monday, Yahoo shares were up 56 cents, or 1.38 percent, after the company announced that sales on its Web site the day after Thanksgiving doubled year-ago results. On Friday, Yahoo gained 7 percent to close at $40.87.

Adding to the sudden enthusiasm for the shares was a report from the U.S. Commerce Department showing that consumers increased their online purchases between July and September by 15.3 percent compared with the same period in 1999.

Despite the sector-wide boost, some analysts issued strong warnings Monday not to get carried away by the holiday frenzy. Many online retail sites are still unprofitable and struggling to increase revenues and contain costs.

"The rally on Friday, keep in mind, was on really light volume and was therefore even less significant," said Argus Research analyst Daniel Peris.

C.E. Unterberg Towbin's Dan Ries said the rally appeared to be just another swing in the market. "I don't think it's sustainable because anytime you see an entire sector move, it can't be reliable."

By midday, the analysts' predictions seemed to be coming true. Amazon.com, which gained 15 percent Friday and continued its rally in early trading Monday, fell nearly 5 percent to $27.62 by midday. On Friday, Amazon.com suffered a brief closure of its site but maintained that the glitch had nothing to do with intense demand.

Meanwhile, Goldman Sachs analyst Anthony Noto released a research note Monday predicting that by this time next year, only 12 to 14 e-commerce companies will remain in existence.

Dot-com burnout
In his report, Noto predicted that about half of the 22 publicly traded e-commerce companies will have to raise cash before the 2001 holiday season. "This holiday season will be decisive in determining which companies will have access to capital next year based on execution of critical success factors," he wrote.

As online retailers struggle for their lives this season, Noto warned against bargain hunting within the group.

"While a number of our holiday tracking studies have shown early strength in both industry level sales and satisfaction levels, we continue to believe only a few select e-commerce companies will see price appreciation," he wrote. "We do not believe there will be a broad sector rally due to strong revenue results as the overhang from the lack of profitability, uncertainty of business models, and cash burn rates will persist."

Despite skepticism about a sector-wide rally, analysts Ries and Peris were bullish on some e-tail stocks, including eBay and Amazon.

"What we're looking at with eBay is the fourth quarter looks like it's off to a fantastic start," Ries said. "Its traffic statistics are up, and its auction listings have gone up."

Peris said that despite the high degree of risk, he remains bullish on Amazon.

"If you have a wise, prudent portfolio and you want to have one risky stock, we think Amazon should be that stock," he said. "Although it is very high risk...with each new e-tailer that closes its doors, Amazon looks better and better."