Fed Hawk Upsets Net Sector's Apple Cart

The DOT is down, but a few stocks, including Red Hat, keep pushing higher.
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Federal Reserve Chairman Alan Greenspan did not say anything to roil financial markets, but another Fed official has upstaged his boss.

Comments by Fed Governor

Lawrence Meyer

have shaken up the market and renewed fears that the Fed is not done raising interest rates. In a speech, Meyer said that the Fed's recent rate hikes were a "partial reversal" of last fall's rate cuts and that tightness in the job market risks fueling inflation unless growth slows. He also said the Fed should consider stocks in rate policy, but not target them. Though Meyer is a noted hawk who has stated his concerns about inflation before, his comments have helped upend the market.

TheStreet.com Internet Sector

index was down 5.40, or 0.9%, at 596.21. The sector has been extremely sensitive to fluctuations in interest rates in recent months.

Among the stocks outperforming are a number of companies that have become the latest hot plays in the sector.

Red Hat

(RHAT)

, which gained 23 points Tuesday, was up another 17 1/4, or 16%, at 125 1/4.

Phone.com

(PHCM)

was up 10 7/16, or 7%, at 160 7/16, while

China.com

(CHINA)

was up 6 1/16, or 11%, at 62 5/8.

Elsewhere, Arthur Newman, Internet analyst at

Schroder & Co.

, initiated coverage on several big Net names today, bestowing his highest honors on

America Online

(AOL)

and

Excite@Home

(ATHM) - Get Report

. Both stocks were rated outperform significantly and placed on Schroder's recommended list. AOL was up 3/4, or 1%, at 94 1/16, while Excite@Home was down 7/16, or 1%, at 38 7/8.

Both AOL and Excite@Home have been out of favor with investors of late, but Newman told

TSC

that he expects the broadband issues with both companies to be eventually resolved and for both to become the two major players in broadband. He said the beginning of digital subscriber line rollouts in December will help AOL, and he also expects subscriber numbers from the U.K. to ease concerns that have been raised over free access in Britain. Regarding Excite@Home, Newman said he expects resolution of the open-access concerns that have plagued the provider of high-speed Internet access, and he expects it to have 7 million subscribers by 2002. He has a 12-month price target of 130 on AOL and 55 on Excite@Home.

Newman rated both

Lycos

(LCOS)

and

Yahoo!

(YHOO)

outperform, and placed a perform in line rating on

Infoseek

(SEEK)

. Newman said he does not anticipate near-term catalysts that would be able to drive Yahoo! and Lycos significantly higher. He said Yahoo! was trading at a "tremendous premium over its peers," while Lycos has more of a depressed valuation related to its peers which makes it more attractive. He has a 57 price target on Lycos and 180 price target on Yahoo! Lycos was flat at 43 5/8, while Yahoo! was off 1 15/16, or 1%, at 153 1/16. Infoseek was down 7/8, or 3%, at 30 7/16.

AOL also was downgraded today by

First Albany Corporation/Equities

to neutral from buy because of competition concerns. Analyst Jeff Sadler wrote that targeting by lower-priced competitors will lower revenue, and he also expects subscriber growth outlook to lag year-ago results. Sadler reduced its target price range to 85 to 106 from 118 to 139.

Also,

Prodigy Communications

(PRGY)

was down 1/4, or 1.5%, at 16 7/8. The Internet service provider said it would acquire the base of more than 80,000 billable subscribers from Web hosting company

BizOnThe.Net

for approximately $100 million in stock and cash.