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Manager gives tips on 'Nets
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December 10, 1998: 11:08 a.m. ET
Fund manager looks long term in Internet investment strategy
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NEW YORK (CNNfn) - The Internet sector remains one of the most volatile on Wall St. as shares of many companies trade within an average daily price range of 10 points or more.
Nonetheless, fearless investors are pumping money into Internet stocks at a mind-numbing pace. Many on Wall St. feel that the euphoria is unfounded, and that investors flush with cash are placing dangerous bets on risky, speculative companies with no earnings prospects and little profit potential.
CNNfn spoke with Ryan Jacob, portfolio manager of The Internet Fund [WWWFX ] about the realities of the companies being swept up in Net mania and how to develop a realistic and profitable investment strategy for this volatile and complex sector. His fund has gained 160 percent this year.
Here is his "Business Day" interview:
JOHN DEFTERIOS, CNNfn ANCHOR: We were looking at… a list of stocks… and it shakes the stomach a little bit because they swing so wildly; these are the big names even that swing that wildly. How do you approach the market as a fund manager knowing that as our backdrop?
RYAN JACOB, PORTFOLIO MANAGER, THE INTERNET FUND: Well, generally speaking, as long as the Internet stocks have been public, they've been a very volatile group. So it's very difficult to try to time these stocks on a short-term basis.
The focus should be on the companies that are really building a long-term franchise, companies that have been enduring business models, companies that are building that brand relationship with consumers. Those are the ones that in all likelihood will be here three, four, five years from now and will make excellent investments.
DEFTERIOS: You used to watch the investment bankers come and talk to you about what's going to be coming in the pipeline, what a company had to offer. Do you think in fact they're putting a ".com" on some of these companies that really aren't true Internet plays and the market is just snatching them up anyway?
JACOB: Generally speaking, when we go through a period of euphoria like we're seeing now, we'll generally see more investment activity, more Internet companies, and definitely we're seeing some secondary and even tertiary names that maybe in a slower market wouldn't be able to go public and they're opening to 400-, 500-percent premiums.
And that's a situation that won't last. It's happening right now. It's a little bit self- perpetuating as each deal comes to market, but eventually that will subside.
DEFTERIOS: Xoom.com [XOOM ] up 146 percent yesterday during the debut and everybody was disappointed; I mean, that really tells us a lot about the frothiness. Does it explode, though, in the next two or three months, and the balloon really comes down to earth?
JACOB: Well, another phenomenon we've seen lately which has added to that premium is the power of the retail investor. And today, they have the power to execute trades on their computers using open orders, and they're attracted to the IPO market because we see these very large premiums in the first day of trading.
And they've been conditioned, to an extent, to invest in these companies as soon as they go public, look for the quick profit and get out. It's added to the volatility and for most investors, it's actually quite dangerous.
DEFTERIOS: AboveNet.com is coming out today. We don't know much about the company, how did you evaluate it, what do you think of it today?
JACOB: Well, I think, unfortunately, it's going to follow the same cycles we've seen with the rest of the Internet IPOs, and that is we should expect at least a 200-300 percent premium.
And it's unfortunate, again, but really, a lot of these companies today are not really being valued on their fundamentals. At least in the first couple weeks of trading, we're still subject to this mania and people are, again, just buying any company with an Internet affiliation.
DEFTERIOS: Let's see if you can add some value for viewers here, what is your approach? What makes it into the portfolio in terms of higher quality compared to the rest?
JACOB: Well, unfortunately for most of the companies we invest in, they're not profitable. So we have to forecast two, three, four years out what that level of profitability may be, discount that, and what would we be willing to pay for that today.
Now, obviously we have to believe in the long-term fundamental prospects of the company in order to reach that point, so that's the first step. Then we do our model, come up with what we believe this company can earn in the future, what is that worth today, and then those are the companies, generally, we'll find as the most attractive investments.
In terms of what we've seen lately in market activity, we've seen most of the euphoria in e- commerce names in anticipation of a strong, fourth-quarter holiday season, which is legitimate, however, again, investors have taken it a little too far and really bid up these prices probably a lot more so then even a strong fourth quarter would indicate.
So, for that reason, we're actually finding some of the better values right now in some of the more established names in the portal area, media and content. They've really not participated as much in the recent run-up. Companies like Yahoo! [YHOO], Excite [XCIT], Lycos [LCOS], even Geocities [GCTY]. These are companies that we think still represent exceptional values and these are companies who are building very strong core franchises that should be here for a long time.
DEFTERIOS: I know we're going to get a lot of calls about your fund, how does one get in? What's the minimum and then the rest?
JACOB: Well, it's a no-load fund, $1000 minimum. Our 800-number is 888- FUND-WWW, we try to make it easy. And yes, so far -- the response we've been getting is very gratifying.
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