Internet Mania

By on October 13, 2006

Originally published in April 1999:

INDEXES ON 3/31/99

DJIA 9,786.16

S&P 500 1,286.41

NASDAQ 2,461.72


After being a bull for most of the past 3 years of writing this newsletter, I can’t help but be a bit concerned about the current environment. The market is looking downright scary to me. Maybe I’ve been visiting too many bearish web sites, but after weighing the evidence it is hard not to be bearishly bent. A host of doomsday prognosticators have been pointing out some interesting divergences. The advance/decline line has continued to trend downward. One recently wrote that recent records for the popular market indexes coinciding with such an incredibly weak advance/decline line has only occurred one time before…… several months prior to the 1929 stock market crash. For an explanation of the advance/decline line and an examination of its implications see Granted, the bears have been pointing out all kinds of ugly things over the past 4 years including the meager dividend yield and sky-high PEs. We might be approaching the time when the stopped clock is right.

This market is the strangest I’ve ever seen in over 20 years of observations. Again, the major indexes are near all-time highs and individual stocks hitting new lows routinely outnumber the new high list. It appears the internet stocks and a few other nifty-20 stocks like Microsoft are sucking up all the available money coming in like an extremely dense black hole. Technology stocks make up an amazing 80% of the total stock market capitalization! Today’s favorite stocks trade at astronomical PEs of 50-100, surpassing past market bubbles. Historically, concentrating your investments in high PE stocks has been a very poor strategy. Everyone, it seems, is jumping on this bandwagon including Laszlo Birinyi, who, in his latest appearance on Wall Street Week with Louis Rukeyser said AOL was one of his favorites. Laszlo has a great record over the last 5 years, however, extrapolating his success into the future could cause investment heartburn. AOL, trading at a PE over 600 has significant challenges ahead and faces stiff competition. My feeling is that over the next 5 years AOL will prove to be a very poor investment.

As for the rest of the internet group, the stocks will disappoint over the long run. The internet business model is full of holes. Companies are placing a great deal of hope on ad revenues, but this isn’t panning out since rates the major players are getting for ads has been dropping steadily. The problem is that the internet has no barriers to entry. Anyone can set up a web site for next to nothing so the potential for competition is virtually unlimited. At least with radio and television there is a limit to the number of channels that can be received. With the internet there is no limit to the number of web sites. Thus there is no theoretical limit to the number of ads. This abundant supply is surely going to drive down ad rates further. Meager profits are all but assured for the inhabitants in this house of cards.

There are benefits to consumers from the internet such as the ability to do comparison shopping at the touch of a keystroke and low cost investment commissions due to the inherent efficiencies of on-line trading. However, I still don’t see how the majority of internet companies will make major money from this business.

The sucking of money from the rest of the market has made for some interesting situations in the small cap area, as many of what were once mid-cap stocks have fallen to small cap status as they continue to hit new 52 week lows. I can mention a ton of names that appear to be attractively priced if the economy doesn’t fall off a cliff. Service Corp. International (SRV), Coachmen Industries (COA), Fleetwood Enterprises (FLE), Champion Enterprises (CHB), Ingram Micro (IM), Kevco (KVCO), Keane (KEA), Zebra Technologies (ZBRA), CBRL Group (CBRL), and JC Penney (JCP) come to mind. These stocks are acting as if we’re in a bear market. There are multitudes like these. They may not currently have stellar earnings growth, but there are some interesting opportunities in the smaller, forgotten, unwanted names.

Links to web pages that can say it better than myself:

Two Wall Street Journal contributors said the Dow should be at 36,000 right now. A counterpoint can be found at:

More on how the advance/decline line continues to bode ominously for the bull:

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