Web Stocks The New Rules

Kiplinger's Personal Finance Magazine, April, 2000 by Steven T. Goldberg

Segalas's Harbor Capital Appreciation (800-422-1050) and Spectra fund (800-711-6141) are both big holders of Internet-related tech stocks and have performed solidly. For example, Spectra owns Cisco, Dell and Sun, while Harbor owns those three plus HP and IBM. Spectra has about two-thirds of its assets in technology stocks, while Harbor has about 35% in technology and is somewhat less volatile. Investors thirsty for a straight shot of tech should consider Fidelity Select Technology (3% sales charge; 800-544-8888) or no-load Firsthand Technology Value (888-883-3863), which specializes in stocks of midsize technology companies.

Business-to-business stocks

IF 1998 AND 1999 were the years of the e-tailers--companies that sell directly to consumers via the Net--2000 marks the dawn of an era in which businesses will realize enormous efficiencies through business-to-business Web sites. Hundreds of companies are making products designed to streamline the way businesses do business with one another--whether it involves ordering computer equipment, making travel arrangements or selling surplus equipment.

GM and Ford plan to do virtually all of their buying on the Internet. Forrester Research predicts that by 2003, $1.8 trillion in business-to-business commerce will occur over the Internet, versus just $144 billion in business-to-consumer commerce.

Pressures on suppliers to cut prices will intensify as buyers begin to compare prices instantly, and an enormous squeeze will threaten the livelihoods of middlemen. Edward Kinsey, chief financial officer of Ariba, perhaps the largest business-to-business Internet firm, espouses a variation on the Golden Rule: "He or she who has the gold tends to rule."

Ariba is a favorite of Alberto Vilar, manager of Amerindo Technology fund. Vilar says Ariba's software enables businesses to acquire "almost everything but the product they're making" over the Internet. Ariba (ARBA, Nasdaq, $212) is expected to lose 50 cents a share this year, and it trades at 314 times its past 12 months' sales. But sales are projected to grow 50% annually over the next five years. Even at that rate, though, the stock still sells at 41 times estimated 2005 revenues of $471 million.

Says Richard Davis, an analyst at Tucker Anthony Cleary Gull: "In today's market, enormous opportunities come with astounding valuations. As such, investors must believe, as we do, that Ariba can manage the rapid growth it faces."

If you're a value investor who gets vertigo just thinking about such pricey stocks, Sterling Commerce is your business-to-business play. Sterling (SE, NYSE, $36) has for years provided private computer networks on which businesses conduct transactions with one another, and it is now switching clients to the Internet. While it faces new competition, the stock is dirt cheap. Analysts expect the company to earn $1.82 per share this year, meaning it sells at just 20 times earnings.

Sterling bought back 20% of its stock last year when it plummeted from $45 to $18 after second-quarter earnings came in lower than analysts had anticipated. Says William Nygren, manager of Oakmark Select fund: "Almost all the major companies in the U.S. use their product, which would make it very difficult for them to switch over to a competitor."