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Dot-Coms: 2 Safer Stocks to Consider

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1. Ancestry.com (ACOM)

Tracking a family tree has always been a lot of fun, and this company makes it easier than ever, offering a set of online tools that track the branches as they spread outward from the tree. The company has garnered great buzz from a companion TV show called "Who Do You Think You Are?" which airs on NBC.

After a late 2009 debut, Ancestry.com settled into a predictable groove. The company topped estimates, issued bullish forecasts and shares marched ever higher. Analysts began to speak of 30% or 40% annual growth and investors got pretty carried away.

Shares are now far from the peaks of last spring, in part because management warned investors last fall that growth was starting to cool from a torrid pace. This was partially the result of a change in pricing schemes to emphasize longer-term subscriptions and reduced customer churn.

Clearly, this is a company entering into the second phase of its growth cycle. Sales rose more than 30% in 2010 and 2011, but are likely to rise at half that pace in 2012 and 2013. Considering less than 2% of all Americans have looked into their family histories, it's reasonable to assume decent long-term growth as the metric moves up to 3% or 4%.

Analysts at Dougherty & Co. say investors are now too bearish on the company's prospects, and predict shares could rebound back to $35, or nine times their projected 2013 EBITDA estimate. Goldman Sachs has an identical price target, noting that peers tend to trade for 12 or 13 times EBITDA. And this is my main point: It's best to pursue more reasonably valued dot-com plays.

Ancestry.com, with a multiple lower than its core earnings growth rate, fits the bill.

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