Climate Is Changing for Net Bellwether Stocks

VeriSign and Exodus are the new darlings of tech-fund managers.
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Fund Junkie: Climate Is Changing for Net Bellwether Stocks

Now might be an intriguing time for bottom-fishing among the Internet sector's battered bellwethers. But what are they these days?

Fears of a slowing economy and the annoying uncertainty surrounding the presidential election -- or the battle of the hanging chads -- is keeping cash on the sidelines and punishing Net stocks in particular. We've typically been told that investors who have the guts to plow money into sagging market leaders during uncertain times like these can make a pretty penny over the long-term. If you've drunk that Kool-Aid and have your checkbook out, keep in mind that among the mercurial and pricey Net crowd, the list of bellwethers is a moving target -- a subject also explored in the latest

10 Questions

interview with Paul Meeks, manager of the

(MANTX)

Merrill Lynch Internet Strategies fund.

A close look at tech-fund managers' Net-stock holdings this year shows an evolving taste, highlighting rising and falling stars. If you're a bold stock investor, this might broaden the list of Net stocks on your radar screen, and if you're a tech-fund investor, it's a look at where your hard-earned dollars are going.

Since Jan. 1, many among the growing corps of tech-fund managers have dumped their stakes in bellwethers like

Yahoo!

(YHOO)

,

America Online

(AOL)

,

Amazon.com

(AMZN) - Get Report

and

eBay

(EBAY) - Get Report

, which was

downgraded by

Lehman Brothers

Monday morning. This is often a compelling indicator because tech managers are a fairly harsh bunch, reticent to hold a stock they don't absolutely love. And with more than $148 billion in their coffers, according to

Lipper

, their fickle moods can move stock prices in a hurry.

OK, the flagging interest in Amazon.com might not surprise you because fund managers have generally decided to boycott the stock until the company starts making money. That goes for big-cap growth fund managers, too. Just 9% of funds in that category own shares, down from 15% on Jan. 1, according to

Morningstar

.

But did you think America Online's fan club would disband this quickly? The firm's acquisition of media titan

Time Warner

(TWX)

got a lot of ink. But the high-profile marriage is mired in

red tape and hasn't been a hit with tech-fund managers. At the start of the year, more than seven in 10 tech funds owned AOL, and on Oct. 31 just four in 10 owned shares.

Large-cap growth managers haven't been thrilled either. Today, 48% of big-cap growth funds own AOL, down from more than 63% at the start of the year.

You also might be surprised by slipping support for Yahoo! and online auctioneer eBay among tech managers. Aside from Amazon.com, these other three stocks are still in a lot of tech funds and are still rightly considered bellwethers. But the fact that managers are selling their shares isn't much of a confidence builder.

Two stocks that appear to be hits with many tech-fund mangers that might not immediately come to mind as Net bellwethers are online security concern

VeriSign

(VRSN) - Get Report

and Web site hosting shop

Exodus Communications

(EXDS)

.

VeriSign, which was in 28% of tech funds at the start of the year, is now in just more than half of the 115 tech funds. The firm, which helps businesses and consumers safely do business on the Net, has also become a hit with big-cap growth fund managers. On Jan. 1, 12% of large-cap growth funds owned VeriSign, but by Oct. 31 that number had nearly tripled.

Despite a tough year, tech-fund managers have hung onto Exodus Communications. The stock is in 41% of tech funds as of Oct. 31 -- just as it was at the start of the year. Since that's the same percentage of tech funds that hold AOL and Yahoo!, the less-heralded stock probably deserves a look.

Of course, tech-fund managers are also looking beyond pure-play Net names to other Net-centric stocks. This pack includes networkers and software shops whose growth is closely tied to the Net, like

Cisco Systems

(CSCO) - Get Report

,

JDS Uniphase

(JDSU)

,

Oracle

(ORCL) - Get Report

and

Juniper Networks

(JNPR) - Get Report

. This quartet is in one of every two tech funds this year, which makes them worth a look. (Beware, Oracle is reeling today from some

high-level departures, and networking stocks are taking a beating after

Morgan Stanley Dean Witter

downgraded Juniper Networks and Cisco Systems, among others.)

There are good arguments for why some of these stocks are or aren't Net bellwethers. But their popularity with tech fund managers implies they're at least worth a look if you're willing to stretch your definition of a Net stock just a bit. This might not be too egregious, because many pros appear to be doing the same thing.

Are these buy lists? No. Is every tech-fund manager out there buying or selling these stocks in lockstep? No. Given the exposure most investors already have to the tech sector, are these pricey stocks best for "play money"? Yes.

But if you're a Net believer, this year's selling might be a rare opportunity to buy stocks that are cheaper than they have been. And for all the Net-stock carnage this year, there hasn't been much talk of the Internet itself going away, so some of these stocks could make you an awful lot of money over the next 10 years.

Lest we forget, there were some tough months and quarters for tech stocks in the 1990s, but a $10,000 investment in the average tech fund 10 years ago would still be worth more than $160,000 through Oct. 31, according to

Morningstar

.

Junk Pile

When institutional investors shop for funds, their first criterion is often a solid three-year track record. Of the 115 retail tech funds, a cool 70% haven't hit their three-year birthday yet, according to Morningstar.

And if you're looking for a sign that value investing might be back, consider that the domain name

valueshares.com

is

currently fetching $499 on

eBay

.

Ian McDonald's Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Also, check out the weekly 10 Questions, which runs under the Fund Junkie banner on Monday mornings. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.