Skip to main content held its Net Stock Summit on Friday in its lower Manhattan offices. This is the first installment of the edited transcript of the Summit, which TSC will be publishing throughout the week. This installment provides an overview of the panelists' background and their views about the Internet sector. An archived audio version of the Summit is available here.

Dave Kansas:

This is

Net Stock Summit for 1999. I'm Dave Kansas and I would like to thank everyone for coming here. We're going to spend about two hours talking about the Internet sector, which is obviously one of the most interesting, exciting, volatile sectors in the stock market right now. We've got a great group of expert commentators, analysts and fund managers -- a good mixture of everybody who's focused on this sector.

And we're just going to give you a quick overview of our program. We're first going to introduce everybody who's here around the table today and then we're going to go over some comments from each person as we go through the introductions. Then we have five questions that we put to readers, so we're going to throw open to discussion here around the table. Then we're going to talk about stock picks. We asked people here to select stocks prior to coming to the panel and have them talk about why they picked individual stocks.

There's one thing that's been true about the Internet stocks in the last several weeks, and that's that they've been a very volatile group. Internet

index, just to give you a flavor, opened the year at 406.42 and today is at 473.71 and in between peaked at 588, so that's the kind of gyration that gets a lot of people's attention. And we're going to try to focus on why the Internet stocks are so volatile, what's happening with the group, how the group could be explained. It's a group that's easy to defy explanation most of the time.

I'm gonna go around the table now and introduce the people here. And after I introduce you, if you could just offer a few general thoughts about the Internet sector, just to give people a view where you're coming from, that would be very helpful.

First to my left is

Ryan Jacob

. He joined

Kinetics Assets Management

in 1997. He's portfolio manager of

The Internet Fund

. During his first year at the helm of the fund group, it went from less than $200,000 in assets to $22 million. It finished the year at the top of the mutual fund heap with a 196.1% return. Before joining Kinetics, Jacob spent three years at

Horizon Asset Management

, where he managed private accounts and directed research for the company's

IPO Value Monitor

. He started his career in '92 at

Bankers Trust

. Ryan, thanks for being here. Just a few quick general thoughts from you before we get started.

Ryan Jacob:

Well, you know we manage The Internet Fund, which is an open-end, no-load mutual fund. At the end of the year, we were at $22 million; now we're at about $122 million. So we've seen quite a bit of inflows due to our performance last year. You know, in general, we employ a buy-and-hold strategy. Actually, even though we had pretty good returns last year, we paid out a very small capital gains distribution, less than a penny. So I think we approach the sector from a very long-term perspective. And we look to buy leaders and really we'd love to hold on to a position for at least three to five years.


All right. Thanks, Ryan. Next to Ryan is

Andy Kessler

, who is a partner of

Velocity Capital

. He's also a contributor to

and his firm is involved in working with companies before they get under Ryan Jacob's radar screen. He's more in the venture world. Andy, tell us a little bit about Velocity Capital.

Andy Kessler:

Well, Velocity is a fund that invests in both small-cap public and middle- to later-stage private companies in the technology and communications space. And what we look for are companies with great management that benefit from decreasing costs of bandwidth. And hopefully what I can provide today is a little bit of insight on some of the things that go on in the private world and perhaps some of the next wave of companies that we'll see.


That's great, Andy. Next to you is

Nick Moore

, specializing in technology stocks at Jurika & Voyles. You used to be at

Orbitex Management

. Tell us a little bit about your approach to some of the things we'll be talking about today.

Nick Moore:

Sure. Well, Jurika & Voyles is in all capitalizations. We look at what the business is worth, what would the entire business be Worth, is it building value. And it's a value-oriented shop. So we don't want to overpay beyond what the entire business would be worth to fractional ownership in it. That's one of the real issues with some of the pure plays on the Internet today is that fractional ownership is worth much more than any rational businessman would pay for the entire company, certainly in cash that would be true. That's the essence of speculation. So what's the path of the stocks going to be? Well, lower. But I'm not a Luddite, right? I think there's a lot to admire in the business models that have emerged in the Internet and in growth. I mean I've owned these stocks in the past.

One thing I hope we get to explore is the companies that benefit from the Internet that aren't considered Internet pure plays -- I think the list of those stocks has grown tremendously over the last year. A year ago, everybody would have said


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, I think, and then by the middle of last year, you know, this isn't exactly hurting


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. And then the list expanded; now it's


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(SUNW) - Get Free Report

. I think we'll find it's actually a lot more companies than from the traditional electronics, the commerce space than just simply in hardware.


All right. Thanks, Nick. Next to Nick is

Herb Greenberg

, resident skeptic and senior columnist at

. Herb, I don't know, what do you got to say today?

Herb Greenberg:

Oh, I'm so humbled. You know, I look back at my column six months ago when I wrote about Internet insanity, and what must I have been thinking? And then I clearly remembered they weren't making any money. But as we all know now, that is not what is important. What is important I suspect is the money they're gonna make. And as we go forward here I think I'll be more skeptical on some of these because I'm convinced that some of these companies will not exist or will be merged into other companies. Not everybody is executing very well. If you try to use e-commerce, you can tell that right away. Some people are executing beautifully. Will they make money? How will they make money? Will Amazon make money?


OK. Thank you very much, Herb. Next to Herb is

Brian Salerno

, one of five portfolio managers keeping track of $750 million at the

Munder NetNet Fund

, a Michigan-based fund. A Midwesterner, it's always good to have a little heartland here at the table. Tell us a little bit about Munder and what you guys are doing there with your funds.

Brian Salerno:

We started this fund in August of '96 with a half million dollars in seed capital and we started to provide investors a way to participate in the rapid growth of the Internet. And from the beginning we've always maintained the idea that it didn't necessarily have to be only pure-play Internet companies that we would invest in. We invest in companies that provide the technologies to enable the Web. We invest in companies who provide the services based on those technologies. And we also invest in companies who use these technologies to better their own business model -- and maybe that was an old-world business -- use Web technology to increase their revenue growth or possibly their improved inventory turns, improved return on capital, improved customer service and so forth. We think there's a wide opportunity out there of all kinds of companies who will directly benefit from the growth of the phenomenon that is the Internet.


Thanks a lot, Brian. Next to Brian is

Henry Blodget

, senior analyst and managing director at

CIBC Oppenheimer

. He's well-known for making some bold calls on the Internet sector. In fact, today, according to one wire, he had some comments about that apparently were received positively since the stock was up about 14%, at least when I pulled up this story this afternoon, to 101. Talking about Web stocks that hit new highs I guess this year. Was that what you were talking about? Maybe the press mischaracterized it. Tell us a little bit about what you're doing.

Henry Blodget:

I work for CIBC Oppenheimer. We're a full-service investment bank and brokerage firm. Essentially, we help companies raise money and we try to be helpful to portfolio managers, in terms of figuring out the sector and coming up with strategies for investing. And essentially, what we've been recommending is that this trend as an economic event is important enough that we think it makes sense for most investors regardless really of the sector that you're investing in. Just to think through what impact the Internet will have on your own sectors. And if you come to the conclusion that you want to put money to work directly in the sector, we have ideas for how to do that. If you want to just play around the sector, there are a lot of great ways to do that.

And then lastly, if you want to just play defensively and really go through a portfolio of existing companies and figure out which ones you're likely to inherit and which aren't, and invest that way. We think that makes sense as well. And essentially, our philosophy for the direct investments is really the same as Ryan's, which is pick the companies with the best management teams that have the best long-term story and are executing the best, and buy and hold. And there's obviously a lot of volatility here, so if you're very smart and quick, you can make money on the trades, but that's not what we're looking to do.


Thanks very much. Next to you is

Jim Cramer

, a columnist for

and also a money manager who probably invests in the Net stocks from time to time. Jim, what's your view of the world?

Jim Cramer:

I come to the table wearing several hats. One is a

founder hat, which is probably the ultimate long-term investment. And then I put the money in in 1996 and haven't gotten any out of it yet. And then the other is as my job is president of

Cramer Berkowitz

, which is a hedge fund. And I trade these stocks every day. I write about them for

. And I think for the purposes of this discussion, I probably represent more of the battlefield reporter engaged in the short term and engaged in what the Net feels like right now. I have written about it in my column pretty much every day. And my feeling has been, although I think we're getting near the end of this phase, that things were great and then got too hot. And things have cooled off and now I'm starting to see some differentiations. But for the purposes of this panel, I think that I'm the hour-by-hour Net guy.


Hour by hour, minute by minute, depending on how some people might read the column that you write throughout the day for

. I thought we'd go next to our poll results and get some discussion going on that.

In the poll we posed five questions to our readers. And the first question got one of the strongest responses. It stated Net stocks are a bubble, yes or no -- or agree or disagree, as the case may be. And according to our poll results, it was actually a lot closer than I would've expected; 53% disagreed that Net stocks are a bubble. And 47% agreed that indeed Net stocks are a bubble, and that's as of this afternoon.

Andy Kessler, in your role as someone who's in the private world and also in the public world, you probably see how some of these valuations move from the venture sector into the public sector and watch how these stocks first start to get treated in the public world. What is your sense about this issue? Are the Net stocks in a bubble?


Well, I think rather than looking at it as a bubble that could either float higher or burst, I sort of look at it and say that from here going forward, it's put up or shut up time for these companies. That, you know, when interest rates go down, high-growth companies are afforded a long duration. Meaning that you don't have to look at next quarter, you can go look at three to five years out and value the company that way. And that provides a great access-to-capital window for these companies saying there's some high value, go to the public markets, go raise money, go to the debt markets and then go raise money.

And it's all been wonderful, but I think that you have to be careful. There's a saying on Wall Street right now, that's: Don't mistake brains for a bull market. And I think here it's: Don't mistake a bull market for a business model.

And that from here going forward that, you know, with all that money that's raised, that the survivors, in my view, are the frogs. The frogs that can jump from lily pad to lily pad and go find business models that are gonna go and work in the space. So I think there's gonna be some carnage and there's gonna be some great companies that will emerge. And I don't think there's just gonna be one day a pin that pops this level. I think instead you're gonna see some balloons, you know, fizzle out. And you're going to see other companies do quite well.


Henry, you actually had specific comments on the sector today that you released. Could you get into the specifics of what caused you to speak out on the group today, in relation to the bubble or not a bubble? Or are you seeing this group break up into some stocks that are vulnerable to the bubble, to some stocks that look like the damage is done? Or what were you trying to say to your clients today?


We were just saying that we thought that a lot of the froth that had gotten into the sector in December and January had finally bled out of it a little bit. There was a lot of negative sentiment out there. People were again talking about how Amazon will never make any money and how it'll be put out of business. That's actually a good time, if you believe in the company, to start thinking about putting money in. And the stocks -- most of them are down, the leaders are down almost 50 to 60% -- so we were comfortable saying if you are looking to make long-term investments in the sector, we're actually thinking of it as a good time to take a look at these stocks.


Brian, in terms of what you guys are doing, are you adding to the positions in the last week? Looking for stocks to buy? Have you bought any specific stocks in the Net sector in the last week?


Definitely. We added a new name this week,

TMP Worldwide


. We think the Internet story in that company is a little underhyped with the Monsterboard,


Great commercials.


Excellent commercials, they're hilarious. We've added to some other positions as well. And we trimmed away from some. The sector is not something, I think -- I don't think you can define it as one movement up or down, in should you put money in or should you take money out. And the first two months of the year, we had


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tripling in a time where Amazon was down 60%. So I think you have to be nimble. You have to be aware of -- I guess the old saying is: When the tide rises, all boats float, but there's a lot of other stuff that floats, too. And you gotta be careful not to invest in that.


Nick, people talk about the Internet sector, like, five years ago they talked about the technology sector, and it was proved very quickly that was just far too broad. There are many, many, moving parts, and we've seen the same kind of striation coming in the Internet group. It seems like some people, you know, well, some are up, some are down. Are we starting to see that the group is maturing to many different subsegments? Is that something that's happening in the marketplace?


That's one of the things that's happening -- in fact one of the reasons I shifted over to doing just technology research is because we're actually gonna talk the whole bigger chunk of the economy into the digital domain from the analog space. From just in terms of merchants. They're certain types of shopping that really -- this is the right store to go to, like the one that's online. For example: For now bookstores are part of the technology domain, right? That's a huge change. Is it a monolithic phase? No. No more so than saying that software companies have the same dynamics as telecom equipment companies to the disk drive. For sure the Internet will take on a character of -- "Well, there's this group of companies and this group of companies and this group of companies."


All right. Anybody else have anything they want to toss in on that bubble issue?


Sure, I wanted to go back to Andy's frog thing.


Go ahead.


People have been out there kissing frogs looking for princes. Mostly, you know, they got a lot of frog on them. I don't know if you want to populate that with names. But that's some of the evidence of what's going on. You know, a company called



put out a press release that said, 'Well, we're not out of money yet. And some engineers still work here.' This was back when they used to be sort of a fourth-rate software company. And the thing goes from a quarter to a one and a quarter in one day on like 10 million shares.

Watch the rest of the Fidelity ad where Peter Lynch said there was like one or two stocks under each one thousand rocks, right? Not 1,000 stocks. Don't buy a thousand rocks when -- you know -- that's part of the problem. And then just empirically, take one of the ones with a really successful business model, like



. OK, 80 times revenues is not the valuation of the business in the here and now, and it may never be. But see how long they have to compound, you know, the growth they've had forward forward before that becomes a mere 100% P/E multiple premium for the market. You know, over time you really don't see companies saying...


What? Are you saying you don't like Yahoo!, or are you just giving a generic...


I'm saying here's a perfectly sound business with an outstanding financial model producing free cash today, you know, 27% operating margin today. You know, they're not paying a lot of tax and they have a lot of interest income -- but here's a business we could value, right, and come up with a top dollar would be somewhere in the 10 to 15 times sales range would be still expensive, right? Andthat's less than a fifth of where the shares trade today, right?


Oh -- but see, I own Yahoo! So I mean, I'm not going to play the game of dissing what I own because I don't own anything that I don't believe in -- in the sense that I am the true short-term believer of what I'm in. And I think Yahoo! is priced appropriately. It's not cheap. And the reason that I feel that way is not circular reasoning, it's not because I'm long it. But because if Yahoo! executes correctly, then I think it's a much bigger and faster-growing business than it is on what we see it is to be now. And if it's the dominant player, then I have to overpay in the same way that I overpaid for Cisco in 1991, in the same way that I overpaid for Microsoft in 1988. These were colossal overpays. If we were having the roundtable at that time, and I have looked back empirically, and decided that those were both cheap relative to where the stocks got to.

Therefore, I'm not going to buy into the: 'Well, it should be at 10 times sales.' It just doesn't make any sense to me. It's not that kind of company.


It's just that if we do look back that Microsoft and Cisco never traded above, say, 10 or 12 times forward...


But maybe that was wrong.


No, no. But they did compound the value over time, thinking of the here and now, right? That we've never seen -- right, it's a terrific business -- I think it's oversold, actually.


Well, that's because it's been oversold.


I think the next trade is probably to the upside in an expensive group because there's been no fundamental change. Let's just say that it mathematically looks like a bubble, acts like a bubble. But something will have to change to unwind that, right? We don't see that change happening today, right? So the mechanics of how we look at that group and how that group's been valued historically -- I don't disagree that there's room for it to rally, right?

When the hyper growth slows down, it'll be how much of the future have you actually discounted away. How much of the future has been discounted away? If they've tripled their business, it's still at over 20 times revenue, right? Well, not tripled. It's sort of already in the stock price, right?


Right. Jim, you tell all your subscribers that, you know, you don't short stock unless the fundamentals are going to deteriorate. They're going to figure it.




So we know historically what drove Cisco up, which was routers and then switches. We know historically what drove Microsoft up, which was operating systems and applications. What is driving Yahoo!'s top line? I mean, what's the growth?


I think that advertisers when they get more comfortable with the Web, which they seem to be doing by the day, will realize that most doctors, lawyers, high-demographic individuals, accountants, professors, don't have TVs, unlike my office where I have


on in the background. They don't have TVs on all day, but may have Yahoo! on all day. And there's a terrific sticky, to use an overused Net word already, reach to Yahoo!. And I think that Yahoo! has one one-thousandth of the ad pull that it will have, maybe, two years from now. That's how explosive I think the advertising revenue is coming.

And it's because of that and because the production cost for Yahoo! programming is nil vs. what ABC, CBS and NBC's programming is, that I think that these are just massively better businesses. Yahoo!'s a much better business than the network business. And I think that it's just going to happen very quickly that people realize it.

Tomorrow: Will portal companies become obsolete?