PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
The worst of the correction in Internet stocks is probably over, according to one of the most respected Net investors, Ryan Jacob. He's chief portfolio manager of the Jacob Internet Fund and founder and CEO of Jacob Asset Management. But he's reluctant to predict the timing of a revival, even though he sees the Net as central for long-term growth. He's not worried about the effects of a possible economic slowdown on the Net sector, unless the Federal Reserve makes it harder to raise capital.
As for where to look for Internet stocks, Jacob concentrates on promising companies that are still relatively low in price. He mentioned stocks such as Aether Systems and 724 Solutions in the wireless area and Be Free, which helps drive traffic to Net sites. In e-commerce, his favorite is Commerce One, as well as companies such as Priceline.com that offer ways to shop (as opposed to places to shop).
Jacob's comments came in a June 8 online chat on America Online, presented by Business Week Online. Here are edited excerpts to his answers to questions from the online audience and from BW Online's Jack Dierdorff and Amey Stone. For a full transcript of the chat on AOL, go to keyword: BW Talk.
Q: Ryan, do you see the Internet stocks reviving anytime soon?
A: Well, we feel a lot better than we did a few weeks back -- although it will be difficult and probably take some time before we'll reach the highs that we saw earlier. We do believe, however, that we've probably seen the worst of this latest correction.
Q: How did you manage the fund while the correction was taking place -- and what are you up to now? Have you snapped up any bargains?
A: We did raise some cash in the fund right before the correction really took hold, but it ended up not being quite enough, given the severity of the decline. As the sell-off persisted...we probably focused more on infrastructure and wireless companies than we had in the past, given that this sector saw some dramatic drops in the share prices.
Q: Since the Net is becoming so pervasive, how do you define an "Internet stock," Ryan? A: We take a very strict view of Internet companies we invest in. We focus on companies that derive a large majority of their revenue either on or from the Internet. We do this rather than look at beneficiaries of the Internet, as there clearly will be many. It helps keep our effort on those companies that are creating new businesses and have high growth potential.
Q: Looking back, would you have started a new Internet fund when you did? A: Well, hindsight is 20/20, and I think five or even 10 years from now, the timing should prove to be irrelevant. Obviously, we believe very strongly in the long-term prospects of this sector of our economy....
Q: I own 1,000 shares in the Jacob Internet Fund. Do you feel it will turn around?
A: Well, obviously I'm very confident that we will turn things around. However, what I can't predict is the timing.... So we try to encourage investors to maintain a longer time horizon, especially in a sector where volatility can be extreme.
Q: What is a long time horizon in the Internet? A: I think that you really have to look at a minimum of three years -- and preferably over five years -- in order to reap the benefits from the sector. I think we've all seen over the last few months why this is the case....
Q: Ryan, what are your fund's biggest holdings today? A: We probably have today more of an emphasis on infrastructure and wireless than we have had in the past, but overall, the portfolio is more balanced than it has been in a while. You can get a full list of our holdings in the fund by going to our Web site, at www.jacobinternet.com.
Q: What are your thoughts on the AOL/TWX [Time Warner] merger? Do you think the stock will recover? A: I think this one will also take some time.... It will be interesting to see if a hybrid Internet/media company can grow as quickly as they are predicting. I have to admit I'm somewhat skeptical at this point and would rather focus more on earlier-stage companies.
Q: What do you think about NetZero [NZRO]?
A: This was a holding of ours earlier this year, but no longer. While we believe that free Internet access will continue to grow, there are numerous new participants in the space that will make competition more fierce than we first anticipated.
Q: This takes us into B2B -- what about VNTR [Ventro]?
A: This was another one of our holdings earlier this year, and while we are positive on the business-to-business space, we chose to stick with Commerce One [CMRC] as our main investment. To us, they seem to have the best partners, the best technology, and the singular focus that we think will be necessary to be successful.
Q: What is your opinion of Exodus [EXDS]?
A: Exodus is the clear leader in Web hosting, and for that position, Wall Street has accorded it a premium valuation. For that reason, while we think it is a great company, we can't get excited about it as an investment opportunity.
Q: What is in the future for CMGI -- do you like it at this price [closing at 60 7/16 on June 8]? A: CMGI is a holding of ours today, and, like many of the stocks in our portfolio, we believe it is very attractive at today's prices. CMGI, however, is somewhat dependent on IPO market conditions and will likely have trouble doing well until that improves.
Q: Would you buy InfoSpace [INSP]? A: This is a company that we believe has been somewhat overhyped, and we are very skeptical that they will be able to dominate the wireless-portal market.... We believe that with carriers attempting to develop their own portals, in combination with existing Web companies like AOL and Yahoo! aggressively pushing on wireless devices, InfoSpace could get left out in the cold.
Q: How do you think the pure e-commerce sites will compete when the brick-and-mortar stores get their acts together? A: Well, I think many of the bricks-and-mortar companies have gotten their acts together, and it's one of the reasons why pure e-commerce companies have had difficulties lately.... In our fund, rather than focusing on places to shop, we tend to look at ways to shop, such as Priceline.com [PCLN] and eBay....
Q: What are your thoughts on Microsoft's potential breakup? I'm curious to know what you think of their Internet assets -- would you buy that side of the company? Also, what effect would a breakup have on the Net sector, if any?
A: It looks like it's quite possible that Microsoft could get broken up. This probably will still take a number of years, however. In the meantime, Microsoft will continue to be a major player in not only the software industry but also the Internet. So while it may not be a company that we would consider for our fund, we still have a great deal of respect for the power that they have today.
Q: What are your criteria for picking a stock now? And have they changed since the correction? Any more focus on earnings?
A: Believe it or not, we think the best opportunities are those companies that are not yet earnings-positive. The reason is, these companies tend to be overlooked by Wall Street and trade at valuations indicative of the skepticism that they will ever reach profitability. We've seen in the past -- and should continue to see in the future -- that those successful businesses that can cross that chasm and show earnings will enjoy significant appreciation in their market value and share price.
Q: What would be the best bets on wireless and on the new Internet appliances?
A: Two of our newer holdings in the fund are focused on enabling wireless devices to perform different tasks, especially commerce. Those companies are Aether Systems [AETH] and 724 Solutions [SVNX], both of which are early pioneers in this very exciting area.
Q: You mentioned liking infrastructure -- does this include, for you, stocks like CSCO [Cisco Systems] and JDSU [JDS Uniphase]?
A: We're not invested in CSCO or JDSU -- really only because of size constraints. We tend to look at companies that are earlier in their business lives, and while they may be riskier, they can offer us more upside potential. One example of one of our names that is significantly off its highs is Be Free [BFRE], which offers affiliate programs to Internet companies to help them increase the traffic driven to their sites.
Q: I know you believe in a buy-and-hold philosophy, but you've mentioned several stocks that you've sold from your portfolio. When do you decide to sell a stock? Have you had more turnover than usual in your fund lately?
A: We have had more turnover in the fund this year than we expected. However, even with these shifts we've made, our turnover rate has still been well under 50%, which is low for any mutual fund and very low for any technology-oriented fund. Our sell discipline is derived solely from the fundamental situation of the companies we invest in. So even if a company's stock may not be doing well, if we feel that their business is continuing to improve, we will be aggressive buyers. On the flip side, there may be a situation where a stock is doing quite well but we have reason to believe that their business could have problems soon -- and we will sell out the name.
Q: If the economy is really slowing, what does this bode for Internet stocks, especially newer ventures? A: The economy slowing doesn't worry me that much. Many of the companies we invest in are so new, and growing at such a rapid pace, that they should do well even in a softer economic climate. However, if the Fed continues to see the need to slow things further, then access to capital becomes an issue....
EDITED BY JACK DIERDORFF
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
