How E-Tail Stocks Might Get Their Groove Back

A few factors that could spark a summer sector rally.
Author:
Publish date:

Investors in e-tail stocks can be forgiven for thinking, "OK, this little correction thing has gone on long enough. We all know the Internet is changing the world, so how about a little market reversal?"

Don't expect second-quarter financial results (which most e-tailers will spew out next week) to provide any fodder for a rally; many analysts are

expecting softish top-line growth. So with everyone newly focused on the

path to profitability, is there anything that can save these stocks, absent actually moving into the black? Here are some potential catalysts for the group as a whole -- and the chances that they'll really happen.

Signs of further consolidation.

Betting on the next company to fall into the e-commerce dead pool is now a parlor game. Layoffs and searches for strategic alternatives are all over the place: Witness

CDNow's

(CDNW)

announcement Thursday that it FINALLY found a buyer in

Bertelsmann

(albeit with a minuscule premium). But there's still an excess of supply out there, particularly in categories like beauty and pets. If more companies go under or are acquired, those left standing may pick up market share.

"Even if they're not

per se

acquiring customer lists, it may help them get top-line growth," says Steven Dray, an associate portfolio manager with

Strong Funds

. (As of March 31, Strong was long e-tailers including

Webvan

(WBVN)

, Amazon

(AMZN) - Get Report

and

eToys

(ETYS)

.)

Likelihood that this could boost e-tail stocks, on a scale of 1 (never!) to 10 (inevitable): 9.

Spillover of the tech-stock rally.

The

Nasdaq Composite Index

has risen almost 30% from its spring lows, but so far this hasn't helped e-tailers. That may change if a bullish market persists, says Dray. Investors hungry to stick their money into tech may turn to e-tailers -- after they've loaded up on infrastructure stocks, that is. A tech rally "can't hurt," he says.

Brian Salerno, co-manager of the

Munder

(MNIAX)

NetNet fund, isn't so sure that more

au courant

areas of tech won't continue to gallop ahead without the e-tailers. "The Nasdaq has already rebounded a lot, and the money is already going elsewhere," he says.

Likelihood: 3.

The Fed.

Investors are hoping that

Alan Greenspan and his merry men are done raising interest rates for the near term. So far, e-tailers haven't exactly benefited from a return of money into the markets, but that may change. If confidence that the economy has slowed increases enough to stave off anymore rate hikes, retailers' shares will likely get a nice little lift. That may eventually trickle down. "If people are more comfortable owning retailers, they may make that leap to owning the e-tailers," says Dray.

Likelihood: 6.

Holiday excitement.

Last year, the low point for e-tailing stocks was midsummer; from then on, most climbed in anticipation of a strong holiday shopping season and resulting strong revenues. Amazon, for example, rose 75% between mid-August and the end of the year. eToys rose through the early fall and peaked at 86 in October, before falling to its current 6-and-change trading range.

That pattern may well repeat itself. "Just like last year, as we move toward the fourth quarter, people will get excited about the prospects for the holidays," says Mark Rowen, an analyst with

Prudential Securities

. Investors, however, are likely to be a little more sober than they were last year. Many companies cut back on advertising and marketing spending following the April market rout, and that may affect sales come November and December. Salerno suspects the e-tailers will see something of a preholiday rally, but on a far smaller scale than last year.

Likelihood: 7.

Another point to keep in mind: Any rally is not likely to lift a broad swath of e-tail stocks. The investors (all three of them) who are still looking at e-tailers, are increasingly narrowing their focus. What's good for Amazon is no longer automatically perceived as also being good for

Garden.com

(GDEN) - Get Report

. That means the biggies -- Amazon,

eBay

(EBAY) - Get Report

and

priceline

(PCLN)

-- are likely to pick up the bulk of any new money that flows into the sector.

And of course, the best catalyst of all will be actually making money, or at least moving up the timeline for doing so. There are plenty of investors who think Amazon's profits will one day rival those of

Wal-Mart

(WMT) - Get Report

, and plenty who think the company will never earn a dime. Until that debate is settled, any catalyst for e-tailing shares is likely to provide only a temporary reprieve.