INVESTING IN INTERNET STOCKS: BUYER BEWARE

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

The Internet is here to stay and, according to many thinkers, its social and economic impact will likely be comparable to the Industrial Revolution. As a result, interest in Internet stocks borders on a buying frenzy akin to the gold rush of 1849. As in the gold rush of 1849, when normally sensible people dropped everything to chase gold with reckless abandon, so in the Internet rush of 1999, normally sensible investors are abandoning tried-and-true approaches in the hopes of "hitting the big one" with an Internet stock.

This frenzy has created market valuations for many Internet stocks that are astronomical by traditional measures -- and consequently very risky. Companies with a few million dollars in sales and years away from showing a profit -- if ever -- are in some cases selling for valuations comparable to blue chip companies with billions in revenues and earnings.

Part of the frenzy is a result of too many dollars chasing too few stocks. When 30 or 40 multibillion-dollar mutual funds buy or sell shares of a relatively few Internet companies, the price gyrations can be dramatic. This results in tremendous volatility, as apparent by the daily price movement of individual Internet stocks. Often, the market price of a stock has changed significantly by the time a quote is displayed or an order entered.

Internet-related companies generally comprise three tiers, each with different levels of risk. At the first -- and least speculative -- tier are established companies with proven management teams and long-term track records that supply the hardware and software infrastructure components needed for the Internet to function. There firms tend to be more diversified and are not totally dependent on the Internet for their success.

Companies that are a "pure play" comprise the second tier. These are in the early stages of their corporate life cycle, and many are not expected to be profitable for some time. There will be some huge winners in this group, but for each winner there will be many losers.

The third tier is comprised of companies that can be described as "Internet wannabees." These are the most risky, as they have recently jumped on the Internet bandwagon as a means to try to jump-start an otherwise ailing business. In some cases the Internet might be a company's salvation, but it's unlikely to cure problems that are a result of fundamentally poor management.

Traditional buy-and-hold investors who wish to participate in the growth of the Internet are well-advised to seek established companies in the first tier -- those that are not solely dependent upon the Internet for future growth, yet are benefiting from it. These companies would be similar to the miners' merchants who sold pickaxes, shovels and pans to the eager prospectors in 1849.

In addition, don't ignore traditional, healthy companies that use the Internet as an additional channel to deliver their products. Notwithstanding all of the hype about net-related stocks, the Internet allows traditional companies to offer dimensions of convenience, speed and pricing that can contribute to their core growth rate.

Finally, don't be tempted to abandon the tried-and-true investing basics, such as diversification. By allowing your investment dollars among a variety of investment types, industries and companies, you'll reduce the risk of owning too much of any single investment.

Likewise, dollar cost averaging -- the practice of committing a set amount toward your investments at regular intervals -- can help smooth out the ups and downs caused by market volatility. Dollar cost averaging allows investors to buy more shares when prices are low and fewer when prices are high. Although it doesn't guarantee a profit or eliminate the chance of a loss, dollar cost averaging generally lowers the average cost to investors.

Above all, don't try to compensate for the inevitable timing mistakes. Investors who try to play this game are merely throwing the dice with their hard-earned money.

The Internet is here to stay, and investing in the sector will be around for a long time. There is no reason for cautious investors to feel compelled to act immediately or risk missing the boat. Particularly in light of the current valuations and volatility of the stocks, patience may be the most important trait investors bring to their approach to this sector.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.