So, you want to invest in the Internet, but you don't want to pay dot-com prices?
Money managers say you can do it by looking at
United Parcel Service
, radio stations and retail chains like
instead of the usual dot-com suspects.
Don't expect home-run returns from these stocks, but buying them might be easier than buying a company that hasn't made a dime or
shares for more than 1,600 times earnings.
In many cases, fund skippers say it's simply a case of looking for off-line companies that handle the logistics of buying and selling on the Net. Like the folks who sold picks and shovels to Gold Rush prospectors, these companies stand to profit from speculators.
For instance, rather than try to figure out which online bookseller will eventually make a profit, why not invest in profitable companies that make money every time a book is bought online, no matter who sells it? asks Jeff Van Harte, portfolio manager of the
Transamerica Premier Equity fund.
He owns credit card processor
and UPS in his fund partly because most online credit card purchases are settled by the former and delivered by the latter.
With a price-to-earnings ratio of less than 16, First Data looks pretty cheap for a company standing in the path of significant growth, says Van Harte, whose fund's annual return is more than 15 percentage points ahead of the
index over the past three years.
Still riding high from its November initial public offering, UPS trades at more than 70 times earnings. But Van Harte "loves" the company that he says churns out more than $1 billion in free cash flow each year. Not a boast many dot-coms can make.
But not everyone is so bullish. Rising fuel costs could take a bite out of UPS' earnings, warns Maurice Werdegar, co-manager of the
OpenFund, up more than 157% since its Aug. 31 inception.
over UPS because it has such a strong presence in the business market. Like UPS, FedEx uses the Net to frugally track packages and talk to customers, but Van Harte says FedEx's national delivery network needs to expand, which will drive up costs. FedEx is trading at just 16 times earnings and is down more than 15% for the year.
, a computer hardware and software distributor, is another logistics play, says Anurag Pandit, co-manager of
John Hancock Small-Cap Growth, which was up 65% last year and holds the stock.
Computer sales over the Net by firms like
were supposed to hurt the company, but Pandit says the company is actually serving as a warehouse for companies like Dell, so Net sales shouldn't pinch its earnings. The stock currently trades at about nine times earnings.
Another Net theme to play is advertising. Dot-coms spend heavily trying to build brand recognition, and Pandit thinks radio stations are major beneficiaries.
His fund owns
. Both are down for the year, but Pandit says they're well-positioned for Internet business because radio ads are cheaper and more regionally focused than television ads.
Companies that already have a brand don't have to go through that expense. That's why many managers say stocks like
can be good Internet plays, since online consumers flock to brands they know.
In many cases profitable offline retailers can easily unseat fledgling online competitors, says OpenFund's Werdegar. He blames
plummeting stock price simply on the "hoopla" surrounding Wal-Mart's online foray.
OpenFund owns Home Depot and Wal-Mart, and Werdegar says the "leading and successful brands" they've built with their stores could be a big boost online, since the companies often have more pricing power and scale than online competitors. The stocks aren't cheap compared with the S&P 500, but they're far from Net stock levels.
But Brian Salerno, co-manager of the
Munder NetNet fund, isn't so smitten. He thinks these companies use the Net as a newer, cheaper distribution channel, but don't take full advantage of it. Who does?
, says Salerno. It's the world's leading Yellow Pages ad company and a recruitment advertiser that has reinvented itself on the Web with its
job-search site, he says.
In its not-so-distant off-line past, TMP would place job listings with newspapers, pocketing some money and sending most of it to the papers, says Salerno. But Monster.com cuts the newspapers out of the equation, so the firm charges clients less money, makes more money, and markets more effectively to both candidates and employers. The new site has transformed TMP, which isn't cheap but trades 20% below its 52-week high, from an "also-ran to a player," says Salerno.
Others say the same about online broker
"Schwab is the epitome of a business that translated to the Net with success. They were able to use the Net to actually provide a better product at a lower price," says Transamerica's Van Harte, who owns the stock in his fund.
He and other managers say that, unlike Wal-Mart and other "click and mortar" shops, Schwab used the Net to change the way it sold and priced products and services, unlocking the new platform's potential.
But isn't Schwab's Net potential already priced into its stock, which trades at more than 50 times earnings? Van Harte doesn't think so.
"I wouldn't say it's cheap, but it's a better investment than dot-coms or the other online brokers. They've got scale and they'll be hard to compete with," he says.
, which trades at just 16 times earnings, might be a savvy Net play now that the old-school broker is letting clients invest online. In fact,
WWWInternet held the stock at year-end, according to
But Pandit says the massive broker is merely "playing defense" online -- hanging on to current customers but not necessarily drawing new investors. And, he says, the firm's thousands of brokers could eventually become a burden -- a bold statement for a portfolio manager whose fund is sold primarily through brokers.
Of course, while many of these companies are Net plays, they won't rocket to the thin-air heights of those Net stocks in the headlines since it's much easier for a small company to grow revenue at a triple-digit clip than it is for a giant. But their size and earnings probably will keep them out of the cellar, too. It might make sense to do what these managers have done: Get creative and try to smoke out cheaper ways to play the Net.