WSJ: How to Evaluate Fallen Internet Stocks

Monday, 15 Oct 2012 08:36 AM

By Dan Weil

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Some big name Internet stocks have plunged by 40 percent or more during the past year, including Facebook, Groupon, Zynga and Pandora.

So how can you determine if any of these is a good buy?

The Wall Street Journal’s Brett Arends suggests a two-pronged test.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

First, there are long-term questions. For example, “Is the company engineered for the web of the future, meaning tablets, smartphones and whatever else Silicon Valley has in store for us over the next several years, or is it engineered for the present?” he writes.

“Another long-term question: does the company have significant barriers to entry, or could an upstart come in and steal its lunch?”

If a company meets these criteria, there’s still the question of whether the stock is trading at an attractive level.

Some Internet stocks have fallen sharply now, but in the dot.com bust early last decade, many slumped 90 percent or more before rebounding.

Generally investors should wait to buy until bulls have completely given up. But many Wall Street analysts maintain their buy ratings on fallen Internet stocks. So that should give some caution.

Interestingly enough, while some big-name Internet stocks have plummeted recently, the Dow Jones Internet Composite Index has climbed 15.3 percent so far this year. That tops the 13.6 percent gain for the Standard & Poor’s 500 Index, before dividends.

So it’s all about finding the right stock at the right price.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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