Many companies tried to dominate the business of Web searching back during the Internet bubble, but only the trio of Google ( GOOG), Microsoft ( MSFT) and Yahoo! ( YHOO) emerged as the true 800-pound gorillas in the space. Unfortunately, that's a lot of gorillas, even in a space as vast as the Internet. Mitchell Rubin, portfolio manager of the $141 million ( BIOPX) Baron iOpportunity fund, says the shift in advertising dollars from traditional to online media will keep all three giants well fed for the time being. But he says Microsoft may have trouble keeping pace in the long run and could be better off simply sticking with software. Rubin's fund, which specializes in Internet-related stocks, is up 2.64% year to date, and has returned 5.3% annually over the past five years. TheStreet.com recently chatted with Rubin to find out more about his Internet strategy and ask him about that long-awaited fourth-quarter tech rally. What is your stock-picking strategy? We look for companies with open-ended opportunities created by the Internet or information technology. The fund is diversified in that we own companies in a lot of different industries, but the basic underlying theme is that the future profits of the firm will be driven by the adoption of the Internet or information technology. With that as a screen for the universe, we look for great companies with a competitive long-term advantage and strong management. We also seek companies with long-term earnings power that the market may not currently be recognizing. In the end, our goal is to find stocks that can double in the next three to five years. It's getting close to Thanksgiving. Where is that fourth-quarter technology rally we kept hearing about earlier this year?
We don't give the seasonality of the sector much thought. We worry about owning companies that we are going to make doubles and triples on over the next three to five years. So if they rally at Christmas or slump in the summer, we don't worry too much about that.
The Internet war between Google, Yahoo! and Microsoft has intensified as of late. Who's going to win? When it comes to the search war, Google is clearly winning by leaps and bounds. Their business model is extraordinary. It's a very well-run company and they are being very aggressive about hiring the best and brightest, which was the same strategy Microsoft used to dominate software years ago. That said, all three companies are the beneficiaries of a bigger trend, which is this huge shift of advertising dollars from traditional media to the Internet. So, on the one hand, there's definitely a market share war going on between those three giants. On the other hand, those three are the only real scale players benefiting from the media shift from offline to online. So if I was at the track should I put all my money on Google to win? Or should I spread my bet among all three horses? We manage money differently in that we only own Google and Yahoo!, not Microsoft. However, I think if you bet them all to win you will be fine. The promises of 1999 and 2000 that were dashed in the bursting of the Internet bubble are very much real today. But rather than having 50 companies of huge scale like we had back then, we now have five or six. And if you own those five or six dominant players you are going to get very good exposure to the Internet's growth. Why don't you own Microsoft? The fundamental problem is that it's a software company and not an Internet company. While they have very smart guys working on MSN, the preeminent goal of Microsoft is not to dominate the Internet. While MSN.com is a good site, it's not a particularly compelling site. They have not innovated that much. In fact, they are probably last when it comes to search innovation. There's no market segment at MSN that is a market leader. People look to Google for search and sites like eBay ( EBAY) for commerce. They don't look to MSN. And generally the leaders win.
During the Internet bubble we had dozens of small companies fighting for market share. But now we seem to be limited to talking about giants. In the end, will this be harmful for Internet growth? I think there is a resurgence of smaller niche Internet companies that is really interesting. Fortunately or unfortunately, a lot of them get a little bit of scale and then get acquired. One trend that has emerged at our fund over the past couple of years is that our better small- and mid-cap ideas have gotten purchased. I would start with Barry Diller at IAC/InterActiveCorp ( IACI) buying three travel companies and a couple of media companies. Do you have any smaller, niche names in your portfolio now? We have a host of them. We own Homestore ( HOMS), which we think is a terrific business now that it has new management and has gotten over its troubles. Real estate to the Web is a waterfall trend where people use the Internet 60% to 70% of the time nowadays, instead of advertising in the newspaper. It's a potential acquisition candidate, but it's still growing as well. We also own Monster Worldwide ( MNST), which is more of a mid-cap now, but it's become the dominant player in job postings worldwide. Then we own smaller companies like Netflix ( NFLX) and financial services companies like TradeStation ( TRAD) and optionsXpress ( OXPS). There is absolutely no shortage of interesting medium and small Internet companies. You just have to be sensitive about the valuation and near-term prospects because it's still a volatile sector.