Net Stock Summit: Internet Funds Beef Up

Spurred by a 9.9% dip in the tech-heavy Nasdaq Composite Index since the beginning of February, Internet fund managers have been prowling for bargains.

The dip has given these managers an opportunity to spend some of the cash that's been flooding in from new investors. They've used it primarily to bulk up on current holdings.

But Ryan Jacob of the (WWWFX)Internet fund saw the recent Nasdaq drop as an opportunity to take a surprise turn into telecom stocks. Lawrence York of the WWW Internet fund, meanwhile, beefed up on some of his winners as he tried to recover from big losers in his portfolio earlier this month. Alexander Cheung of Monument Internet took enough profits on Go2Net (GNET) to cover the price he originally paid for it.

And (MNNAX)Munder NetNet's Paul Cook and Brian Salerno, who had kept their cash position low, stuck with their top holding, CNET (CNET), which they began accumulating in earnest late last year.

Internet Fund Looks Elsewhere

There were some surprising developments at the Internet fund, which had been the purest play among the four self-proclaimed Net funds. Ryan Jacob's $120 million fund has added some telecommunications stocks.

In the most recent update to his Web site, Jacob lists Trans-Atlantic fiber-optic builder Global Crossing (GBLX), long-distance carrier IXC Communications (IIXC), "last-mile carrier" NTL (NTLI) and fiber-laying, local and long-distance carrier Qwest Communications (QWST) as his latest additions. He also picked up TMP Worldwide (TMPW), operator of the Monster.com job-finding Web site.

The 29-year-old manager, whose fund is posting a 31.6% return year to date, says these new telecom companies might not look like Internet stars now, but they will in the future.

"With the convergence of voice and data over the next few years, they are really going to be the backbones of the 21st century," Jacob says. "It's funny, if the stock prices of these companies had gone up five times in the last three months, you would say, of course, they're Internet companies."

The recent Nasdaq dip also was an opportunity for Jacob to buy into eBay (EBAY) when it dipped below 200 in late January.

The stock traded recently at 233, or more than 3,883 times earnings. But Jacob says he had been resisting the online auctioneer because of his concerns about its business model rather than its valuation.

"EBay was really never a valuation question," Jacob says. "It was about competitive issues and whether or not the sellers-commission model would be sustainable over the long term."

Jacob became convinced when eBay, which gets a commission for the goods sold on its site, refused to give up market share to its non-commission-charging, advertising-based competitors.

Meanwhile, he dumped Lycos (LCOS), which plunged on news that it would be bought by USA Networks (USAI) for a price investors seemed to think was inadequate.

Despite this apparent sell-at-the-bottom approach, Jacob stands by his decision. "We're fundamentally driven here, believe it or not," Jacob says with a chuckle. "Trying to predict day-to-day valuations is a fool's game ... The only reason that Lycos came back as strong as it did is because of rumors that [the USA Networks deal] might be called off."

WWW Internet Likes Lycos

While it seemed like most of the world was panning the Lycos-USA Networks deal, Lawrence York of the $16 million WWW Internet was out buying both of the companies.

"We think that there's a preponderance of people who are looking at this thing all wrong," York says. There are synergies that make the Internet search engine and the television home of pro wrestler Stone Cold Steve Austin a good fit.

"We think the Internet is more than just a retailer, and we think that with any emerging industry there's going to be consolidation," York says. "The game for search engines is expiring, and you've got to add new dimensions."

York says he also added to holdings in Broad Vision (BVSN), Broadcom (BRCM) and Qwest Communications. He says he's added other companies as well, but he didn't want to spill the beans on them until he was done buying. With the way these stocks jump, who can blame him? His fund's up 20.6% year to date, despite suffering some major fallout from problems at USA Talks.com (USAT) and some other top holdings.

Monument Trims Go2Net

"You have to have a little faith and a little longer time horizon to be able to get into the Internet area," says Alexander Cheung, manager of the $5.5 million Monument Internet fund.

That didn't stop him from trimming his position in Go2Net recently when he saw a good opportunity to take profits.

"Put it this way," he says, "the stock that I sold already paid for the original investment I made. What's better than free?" Since Dec. 31, Go2Net is up 169%.

Cheung's buying some new names, too, such as CMP Media (CMPX), a publisher of high-tech magazines, which he picked up recently at 16. It has risen to 26 since announcing it was entertaining thoughts of a sale or merger.

"We could have made more money if we had gotten in earlier, but it's not bad to make 60% cash in a week," Cheung says. His fund returned 41.5% for 1999 through Feb. 11, according to Lipper.

NetNet Likes CNET

Rather than discuss what they've been buying lately, Munder NetNet's Paul Cook and Brian Salerno prefer to talk about their No. 1 holding, CNET. The $800 million fund's investment in the technology Web site operator now totals $30 million.

"At the end of 1998, we raised CNET to the largest position in the fund," says Salerno. "And it was a pure play Internet company in the midst of all this hoopla. But we really thought that on a relative basis, it didn't have the run-up that these other [Net stocks] had seen."

That has since changed. CNET is up 126% since Dec. 31. It closed at 120 3/8 on Wednesday, or 802 times earnings, before getting pummeled Thursday.

Salerno compares the company with Yahoo! (YHOO), saying, "You're buying the same concept."

One conspicuously non-Internet play in the portfolio is Office Depot (ODP), the Delray Beach, Fla.-based office supply retailer. Salerno says the company is revving up its Internet engines fast with direct order capability online.

"It seems like they are running a lot faster to get their business on to the Web than their competition," says Salerno. The fund is up 20.6% year to date.

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Ryan Jacob will be one of the panelists at the TSC Net Stock Summit Friday, Feb. 19 at 5 p.m. EST.

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