Net stocks are nowhere as frothy as they were during the dot-com boom, but they're still pricey. That means any disappointment, especially from high-profile companies such as Google (GOOG
) and Yahoo! (YHOO
), weighs heavily on the entire sector. At yearend, the BW Web 20, our portfolio of blue-chip Net companies, was up 30% since our last semi-annual revision in August. With the recent pullback Avilio foresaw, it's up just 11.5%. That's not bad: It beats the Standard & Poor's (MHP
) 500-stock index' 5% gain but just trails the 12% for the AMEX Interactive Week index (IIX
) Web composite.
As we visit the portfolio again, we're keeping an extra-sharp eye out for value. To make room for better-priced stocks, we are dropping six. Audible (ADBL
), which sells downloads of audio books, and Amazon.com (AMZN
) are out because of their high price-earnings ratios (over 50 for Audible; 64 for Amazon). The Web real estate company ZipRealty (ZIPR
), Chinese interactive-game company Shanda Interactive, and online wireless-phone merchant InPhonic (INPC
) leave on weak earnings. Provide Commerce (L
), an online florist, falls out because it was just acquired.
Our hunt for lower p-e ratios produced four of six new picks, two from well-known niches: online brokerage and advertising. Stockbroker TD Ameritrade's (AMTD
) merger with TD Waterhouse could generate enough growth to justify its 22 p-e: Merrill Lynch (MER
) analyst Harold Pinschmidt expects savings to begin by fiscal 2007, as management tries to reprise its successful merger with Datek Online Holdings (AMTD
). Digitas is the No. 2 online pure-play ad agency behind Web 20 member aQuantive (AQNT
), but Digitas trades at 21 times 2006 estimated earnings, about a third of aQuantive's p-e.
Two other entries are from more obscure parts of the New Economy. WebSideStory (WSSI
) makes software for e-merchants to track what consumers do on their sites and what prompts them to buy. Jon Nordmark, chief executive officer of eBags, says this allows e-merchants to spend less on advertising. The stock trades at 25 times earnings. Cheaper yet is J2 Global Communications (JCOM
), whose eFax service converts faxes to e-mail for storage and recordkeeping. CEO Scott Turrichi says J2 expects to make about $2.40 a share this year, and the stock goes for just 17 times earnings.
Even with our concern about valuations, we're willing to reach out to some pricier companies -- Blackboard (BBBB
) and VistaPrint (VPRT
) -- because of their excellent prospects. Blackboard's software lets colleges do everything from podcasting lectures to tracking prefunded student debit accounts so Junior can pay for coffee at an off-campus Starbucks (SBUX
) with his school ID. With projected profit growth close to 25% a year, its p-e of 37 isn't out of line. VistaPrint has patented ways to batch thousands of small jobs and print them cheaply. Goldman Sachs (GS
) analyst Anthony Noto says margins are expanding as VistaPrint grows. The rub is its stiff 76 p-e.
Web stocks could have a few tough months as the market reappraises how much to pay for growth. Even with our changes, the average p-e of Web 20 stocks is 38. That's still more than twice the p-e of the S&P 500. But with the Web economy growing about six times faster than the overall economy, it's a reasonable balance of risk and reward. By Timothy J. Mullaney