Personal Finance: No need to panic, but we must become more selective when buying those Internet stocks

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Indy Lifestyle Online
HOW DISAPPOINTING it has been to discover this week that the Great British Internet Investment Bubble has burst. My disappointment stems from my failure to notice it being inflated in the first place. The pins which have pricked this fledgling orb have came from four of our home- grown Internet stocks. First, Freeserve, the UK's largest internet service provider (ISP), saw its shares fall below the price at which they were sold to an enthusiastic stock market in July. A similar fate befell eXchange, an on-line financial services provider. Then JSB Technologies, which offers technology allowing employers to control web surfing by their staff, snubbed the London Stock Exchange's initiative last week to encourage high-tech stocks to list locally when it declared it was switching its listing to Easdaq, based in Brussels. Finally, QXL.com, the online auction business, unveiled a valuation for the company's upcoming flotation which indicated that its value had halved since the listing was first mooted a few weeks ago.

This combination of bad news led some commentators and analysts to conclude that Britain's brief flirtation with Internet stocks had come to a shuddering halt. That warrants closer scrutiny. In particular, those investors who include a long-term equity element in their balanced portfolio must examine whether they should abandon any interest in Internet stocks or take a more considered view.

This summer has been characterised by hyperbole relating to anything vaguely connected with the Internet. It has been hard to find any company prepared to dismiss the Internet as a mere fad. I have lost count of the number of e.commerce, e-tail online initiatives launched in the past few weeks. Superimposed on this flood of web sites has been a handful of stock market flotations backed by endless stories of teenage creatives poised to become multi-millionaires on the back of a good idea. We have been witnessing an electronic gold rush of the most epic proportions in which a new breed of prospectors - the '99ers - appear to have found a new economic paradigm. This hype set expectations at unrealistic levels.

In addition, the British have an inherent, if disagreeable, tendency to put commercial heroes on a pedestal only to knock them down. Wealth creation is often envied rather than admired so any chance to knock success is grasped. Much of the knocking has come from those who were not prepared to embrace the Internet vision. Their "told you so" approach to this week's news merely confirms their Luddite credentials.

Most importantly, it is crucial to look at some of the circumstances of companies in the eye of the storm. Freeserve was always going to be a classic opportunity for the stags. Demand for the shares was whipped into a frenzy ahead of flotation ensuring a magnificent premium for investors whose only interest was to make a quick profit. The shares were priced at 150p yet they traded at 247p immediately after dealings began. By definition the share price was always going to drift back.

There was also a marked absence of reliable valuation models on which to judge the Freeserve which left it to the market to provide a short- term valuation. That market always relies, to some extent, on sentiment and when that turns sour, share prices suffer.

JSB is, to some extent, also responding to sentiment. It is an older Internet firm which wants to raise funds for a US acquisition. Its move to Easdaq reflects the historical British aversion to provide capital for high-tech ventures. I would guess that when JSB was planning its acquisition of a Californian rival it found Easdaq more accommodating.

QXL and eXchange are caught in the crossfire. It can be argued that QXL by reducing its valuation ambitions could help reverse the negative sentiment. It is already adopting a more conservative approach to pricing. Don't forget this all comes in a week which saw Regus, the office service provider, delay its plans to float and MG, a metal trader, lurch to a large discount when trading in its shares began.

Ironically, London's disenchantment with the Internet, comes just as US high-tech stocks regain some lost favour . Yes, air will be let out of the US Internet bubble now and again but that is largely to avoid a big bang.

Long-term UK investors need not panic but we must learn to be more selective about the Internet stocks we support. You can avoid being ripped off by avoiding all Internet stocks, but you will miss some marvellous chances for stunning gains. Spotting the winners and discarding the losers will not be easy, but those who take time will do better than those who run with the herd.

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