This column was originally published on RealMoney on Nov. 8 at 2:17 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Sometimes you have to take matters into your own hands.
I believe a decent index of Internet stocks would be a reasonable buy-and-hold over the next decade or so. However, the available Internet indices are all out of date and there's no longer an indexed way to buy and hold the Internet stocks as a basket. So, I'll put together a basket of stocks that I think would represent the Internet. But first,
For instance, it used to be you could simply buy the
Nasdaq 100 Trust
( QQQQ) as a proxy for the Internet back in 1999. But the makers of the Nasdaq 100, having dropped excellent companies to fill in with Internet stocks at the very peak in late 1999 and early 2000, then committed similar sins by dropping the Net stocks after the bust.
Similarly, indices like the Amex Interactive Week Internet Index contain stocks that I do not feel should be in a basket of stocks representing "the Internet."
are all important stocks and perhaps should be in a basket representing communications or communications technology. But ultimately, these stocks are commodities, and after the next wave of growth they will not have the nonstop growth I expect the Internet stocks will experience.
( RHAT) and even
also are interesting stocks to follow, but they face similar commoditization threats, which is why these stocks are now usually trading at single-digit multiples near their cash levels. One Internet-based index even has
( CMGI) in it. Although I do think CMGI was at one time the Internet behemoth to beat, it has been beaten and should not be on an index.
I hate to use a "3C" cliche, but the Internet is about commerce, community and content. If someone wanted to put his money in a basket of Internet stocks and go away for 20 years (i.e., have the index be his investment in the Internet), here is how I would approach it.
First off, diversification is still important. There are subsectors, all of which have enormous growth potential, within the Internet context. These subsectors are search/media, commerce, mobile, marketing and enabling.
Media don't necessarily mean TV shows but rather, community, and media usually overlaps with search. For instance, is
a search company or a media company? It's a search/media company.
So because the professional indexers haven't gotten it right, here is my New Internet Index:
For each subsector I pick best of breed rather than simply blindly picking every stock in the space (for instance, Mamma.com and Airnet will not be found on this list):
- Search: Google (GOOG) - Get Report, Yahoo! (YHOO) , IAC/Interactive (IACI) (via AskJeeves), Microsoft (MSFT) - Get Report
- Media: RealNetworks (RNWK) - Get Report, Apple Computer (AAPL) - Get Report, Time Warner (TWX) News Corp. (NWS) - Get Report (The MySpace acquisition gives News an entree here, although I do think the company will not rest with that one buy.)
- Commerce: Amazon.com (AMZN) - Get Report, eBay (EBAY) - Get Report, priceline (PCLN) , Monster Worldwide (MNST) - Get Report, E*Trade (ET) - Get Report
- Enablers/Analytics/Marketing: Keynote Systems (KEYN) , aQuantive( AQNT), WebSideStory (WSSI) , Marchex (MCHX) - Get Report, Miva( MIVA) ValueClick (VCLK) , VeriSign (VRSN) - Get Report
- China/India (deserves its own category): Sina (SINA) - Get Report, Shanda Interactive( SNDA), Tom Online( TOMO), 51job (JOBS) - Get Report, Baidu (BIDU) - Get Report, NetEase (NTES) - Get Report, Rediff.com (REDF)
Finally, it's worth mentioning the stocks I did not include.
I didn't include niche content providers and media companies such as
because although I believe some of these companies will succeed and flourish, their growth will not necessarily represent the growth in the Internet, particularly if some of the bigger players focus on these niches and try to dominate (possibly by acquiring some of the niche players).
These are not bad investments, I just didn't want to include them in an index representing the general Internet. For instance, as much as I like TheKnot.com and have recommended it in the past, once Google launches "Google Weddings" there's a reasonable chance TheKnot.com's bottom line will suffer.
I also did not include
in e-commerce because there's a bit too much hair on the story with all of the clamor about Sith Lords and so on. And I didn't include
because the travel segment is represented by priceline. Similarly, I didn't include Ameritrade because I feel E*Trade is representative of the online trading space.
The general indices get tampered with too much. Rather than being passive indices representing the market, the Nasdaq,
and Russell index makers get the itch to be active investment managers and like to fiddle, either every few months or, as in the case with the Russell, once a year. The New Internet Index is a buy-and-hold-forever portfolio.
In other words, I will stick with the companies listed above unless one of them gets bought, goes out of business, or firmly exits the Internet business -- and I'll only replace it then.
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James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
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