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Internet stocks come under scrutiny

ELECTRONIC commerce and Internet stocks have shown spectacular share performances in recent times – but just how sustainable is this bullish trend and how should investors separate market hype from business reality?

Hartley Poynton technology analyst Shane Hodson said the key issue “is that we are at the beginning of something quite different”.

The difference is centred on the nature of the Internet itself and how to apply the standards and criteria of sound business evaluation and modelling when considering investment strategies in this rapidly developing market.

“Its functionality is so unknown in many ways,” Mr Hodson said. “Positions change overnight.”

The two most difficult areas when assessing Internet investments are determining the true value of the companies and services, and the lack of comparable results to test long-term worth.

Internet-related stocks present good trading opportunities for risk-conscious investors. Longer term holders can gain substantial investment returns by understanding the underlying business and earnings drivers, and selecting a portfolio of stocks with the most robust earnings outlook.

“If you are going into Internet-related

investments you need to have a strong appetite for risk,” Mr Hodson said. “The returns can be great, but so can the risks.”

Despite these difficulties, there are a number of investment approaches that can be taken, including strategies for the more cautious investor.

Telecommunication companies such as Telstra, Optus and AAPT who have a share of their

business in the Internet can provide stable but diluted exposure to the Internet market.

Mid-level investments include emerging

companies such as Ecorp that offer a diversified range of Internet-based income streams.

“The thing to remember is that a bad offline business is a bad online business – the Internet doesn’t make much difference to fundamentals,” Mr Hodson said.

• Jason Willoughby is an investment advisor for Hartley Poynton.

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