Twice-Shy Funds Still Smitten With 'Net's Big Three

The fate of eBay, Yahoo! and Amazon.com shares rest literally in the hands of mutual fund managers, considering the institutional ownership levels of the three stocks. Institutional ownership levels of 45% or above are considered high, according to Patrick J. Dennis, a professor at the University of Virginia who has studied herding behavior among mutual funds.

Institutions own 61% of eBay and Amazon shares and 60% of Yahoo! shares, according to Yahoo! Finance. The percentages are even higher when one examines the float -- the number of shares publicly owned, removing restricted shares. Institutions own 79% of publicly traded eBay shares, 69% of Yahoo! and 88% of Amazon.com.

It's hard to blame the fund industry for dog-piling. So far in 2003, eBay shares have climbed 65%, Yahoo! shares are up 99%, and Amazon.com shares have risen 103%. This has pushed the companies' price-to-earnings multiples to extremely high levels: Yahoo! sports a forward P/E of 93, while eBay's P/E is 76 and Amazon's is 80.

Given that the shares of the three companies are priced for perfection, the big risk is that once managers turn sour on the big three because they cannot meet impossibly high expectations, a long downward selling spiral may commence. Indeed, Yahoo!'s 7% skid the day after posting strong earnings last week signaled that anything less than great news may be cause for concern.

Kinnel says many fund firms have learned a painful lesson about letting their funds get overly dependent on a few stocks. In April 2000, for instance, seven of Janus Capital Group's(JNS Quote) 15 funds counted Nokia(NOK Quote) as its top fund holding. Nokia's downturn, along with downturns in several tech stocks the firm loaded up on, crushed Janus funds in the three-year bear market.

"A lot of fund firms went way too far out on the limb at the markets peak," Morningstar's Kinnel said. "Janus and Putnam realized they had to change things."