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Dot-Calm Strategy to Profit From Net Mania

May 16, 1999|KATHY M. KRISTOF

Want to profit from Net mania, but don't want to risk your life savings by buying steeply valued "dot-com" stocks? There are a couple of safer strategies that may work, experts say. They boil down to either investing in businesses that could profit from the Net--or waiting a while.

For instance, you might want to think about shipping companies such as Federal Express; printing companies such as Hewlett-Packard; phone firms such as MCI WorldCom; and data management and software companies such as Informix and Oracle.

Few prospectors ended up rich in the California Gold Rush--but the guys selling pans and jeans and meals to prospectors earned fortunes, says Alan F. Skrainka, chief market strategist at Edward Jones in St. Louis.

In other words, one approach is to think about companies that benefit indirectly from the burgeoning Web.

The reasons are twofold. First, most "dot-com" companies have steep valuations, which means they could fall hard if they fail to meet the high expectations built into these share prices. And second, they're exposed to huge risks because technology and competition are changing so rapidly. Today's leaders could well be tomorrow's losers.

But companies that facilitate Web commerce are likely to profit as the Internet business is thriving.

Before any Web-based company can be launched, somebody has to buy a computer and a modem and hook into a telephone line. If they're selling anything, they've got to ship it. That requires packaging and mailing. And if the company is to grow, it probably needs software to help it manage orders, customers and inventory.

Consumers also need equipment, of course, to participate in the Web-based world. A computer, a modem, a phone line. And since so much of what's on the Web is worth printing--from fine art to recipes--why not a color printer? At $100 or $200, a nice color printer is practically free--thrown into the "package" when you buy a computer. But those little ink cartridges cost $40 to $50 each. And, if you print many greeting cards, you'll run through cartridges fast.

What about those sizzling Internet IPOs? Initial public offerings of Web companies have gone wild in the last year, often doubling and tripling in price on their first trading day.

Though Net IPOs may be tempting, Skrainka says they're likely to fit the pattern of past "hot" stock categories. When the personal computer came out in the '70s, investors wanted the hot companies--Apple, Commodore and Eagle. When biotechnology was the rage in the early '80s, people chased a bunch of now-anonymous companies working on AIDS drugs, as well as a few firms such as Amgen and Genentech that became successes.

If you waited awhile to invest in these sectors, you wouldn't have made quite as much on the winners--nor would you have lost as much on the losers.

"Nobody was asking about Intel and Dell in the early '80s," Skrainka says. "They were asking us about the market leaders, which were Commodore and Osborne."

Naturally, investors want in from the jump. But, Intel went public in 1971, Microsoft in 1986 and Compaq in 1982. If you had waited to buy shares in each until 1990, you would have still have earned average annual returns that ranged from 37% to 400%.

"Wait for the leaders to emerge," Skrainka advises. "Yes, you will leave some money on the table, but you will vastly increase your chance of success."

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