What Makes a Good Business?

Take a good hard look at your Net stocks for the coming year.
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When analyzing a Net company, I like to ask myself a simple question: Is this a good business made better by the Net, or is this a company that has a marginal business that the Net can make a little better?

Right now that filter arguably cuts off too many companies. I missed the

SkyMalls

(SKYM)

and the

Genesis Direct

(GEND)

. But I couldn't really get them anyway. I don't like to buy stocks up a dozen points, even though late this year you could have made money doing so. That's my discipline and I have to live by it, because for over 20 years it has worked well. I am not willing to throw it away for the sake of three months when you made money that way.

Why, you may ask, is it worth filtering anything out? If every stock that adds a .com makes money for you, what is the worth of having any criteria?

To which I say, we are in a very artificial environment until early next year. There are still only a handful of .com stocks. That has the effect of making the quantity so scarce that anything can work. The growth of the Net is so explosive that it carries even the worst ones forward.

Soon, however, there will probably be triple the .com stocks we have now. Soon, there will be some .com stocks doing better than other .com stocks (right now they all trade in unison). Soon, not all stocks will be rated strong buys. And soon the insiders will catch on and start dumping. At that point, you are going to see the first serious downdraft in the Net. At that point, the undercapitalized players and the flippers will be driven out. At that point you have to ask yourself, if the capital markets for the Net, right now as easy and as liquid as any I have ever seen, dried up, would this company be able to make it?

It seems inconceivable in a world where a press release can move a stock two or three times higher that such a day will come. But it will. At that point I will want to see if there is MORE THAN ONE STREAM OF REVENUE. Could a site charge for its content and still expect people to go to it? Is advertising AWAY FROM

America Online

(AOL)

decreasing or increasing? Are all of those members of sites paying anything? Can those members be monetized? Is the company making any money at all on what it sells on the Web?

Right now even framing such a discussion would knock out a host of good-acting stocks including one that I have hung on to,

Amazon

(AMZN) - Get Report

. Why have I stayed long Amazon? Because its business has MOMENTUM. But by my calculus, in 1999 you will need more than just momentum. (Momentum means that whatever analysts are predicting for revenues, it exceeds those revenues dramatically.)

Let's use a really mean-spirited example, giving the bears every benefit of the doubt. I used to be long

Boston Chicken

(BOSTQ:OTC BB) because it had the momentum. I knew it wasn't making any money, but I also knew that at a certain point, it could flip into dramatic

McDonald's

(MCD) - Get Report

-like profitability if it executed.

It failed to execute; that became obvious about two years ago when it started slowing down in sales.

Sometime in 1999 Amazon will switch from a momentum stock to a stock that gets graded by more traditional benchmarks. I don't know when that will occur, but when it occurs, if there is any execution slippage, I will have to go, because right now the world is gunning for Amazon, just like the world started gunning for Boston Chicken. For most of 1998 the bricks-and-mortar guys ignored Amazon, thinking that it was some sort of novelty, just the way they ignored Boston Chicken.

But nobody is ignoring Amazon now. Now it is in

Wal-Mart's

(WMT) - Get Report

interest to lose money on every book it sells on the Web just to STOP Amazon. It is in

Barnes & Noble's

(BKS) - Get Report

interest to hire the top four people from Amazon and have them rebuild the site and then rebate cold hard cash on every book they sell. It is in

eBay's

(EBAY) - Get Report

interest to make a deal with

Simon & Schuster

to auction spare books.

When there is that much glare, everything has to go right. Which is why I come back to the simple question: Is this a good business? Because in 1999, it better be if you expect people to stay long it through the coming Net selloff caused by the glut of new Net offerings.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At the time of publication, the fund was long Amazon and AOL, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com

.