I first warned
readers about these stocks last month. Since then, many of them
have fallen -- including one that fell 25% and another 27%.
Now, recent actions by some of the companies in this industry have
solidified my opinion. I'm still convinced millions of investors
are running the risk of losing money in a situation that's eerily
similar to one that caused trillions of dollars in losses a decade
ago.
Back then,
Amazon (Nasdaq:
AMZN
)
shares
plummeted 94% from a split-adjusted high of $107 per share to only
$6 when the bubble burst.
Yahoo! (Nasdaq:
YHOO
)
followed the same track -- dropping 95% from $108 to just $5 per
share.
You've no doubt heard the news about recent multibillion-dollar
Internet IPOs. "Web 2.0" companies such as Groupon, Zynga, LinkedIn
and Facebook are the hot topic of
Wall Street
right now. The mainstream financial press can't get enough of them.
For example, Facebook has dominated the headlines for months, even
though it won't go public until May.
Yet despite all the hype, I'm convinced investors will be best
served by avoiding these stocks right now...
As I told you back in March, these stocks have traded at levels
reminiscent of the technology bubble in 2000. Zynga lost $1.40 per
share in the past year, yet until a few weeks ago, the stock was
showing a gain since its
IPO
. Groupon has lost $350 million in the prior 12 months. And
LinkedIn, while showing a
profit
, trades at a price-to-earnings (P/E) ratio close to 900 right now.
Unfortunately, a flurry of news reports coming out about many of
these companies paints a grim picture for investors. I believe
millions of investors are running the risk of losing money,
especially with the upcoming Facebook IPO, which will draw a lot of
attention and could
mean
sky-high valuations.
It all boils down to one thing. I believe that if you want to
consistently make money in the stock
market
, you have to focus on the companies that show a dedication to
rewarding their investors. And I haven't seen this group of
companies take these steps.
Take, for instance, Facebook's purchase of the photo "app" company
Instagram. I'm not a mobile app expert. But I don't think you have
to be to realize something is very wrong when one company shells
out $1 billion for another company that didn't even exist two years
ago. This price tag means Instagram is worth roughly $83 million
per employee. For comparison,
Apple (Nasdaq:
AAPL
)
, arguably the most successful company on the planet, is only worth
$9.3 million per employee.
I'm just not sure how a company such as Facebook can be a good
investment when it makes expensive acquisitions like that. I simply
don't see these moves as being in the best interests of their
future shareholders.
Then there is mobile-gaming company
Zynga (Nasdaq:
ZNGA
)
. The company's stock had been soaring despite the business not
earning a profit. Then in late March it announced that company
insiders were selling 43 million shares of their personal stock,
worth over $500 million. That's not very reassuring. Since then,
the shares are down 25%.
Groupon (Nasdaq:
GRPN
)
is down 53% from the first week of November, when it raised $11
billion in a highly celebrated IPO. That sell-off accelerated in
late March after the company had to restate fourth-quarter
earnings
, resulting in lower revenues and profits (and a shareholder
lawsuit).
In fact, of the three Internet stocks I mentioned a few weeks back,
both Zynga and Groupon are down more than 25% since then.
LinkedIn is the only stock that's up (and the only company showing
any profit). Even so, the shares trade at a P/E of 890. I still
want nothing to do with the stock.
Don't get me wrong, I'm not saying companies such as LinkedIn and
Facebook are going to go bankrupt. On the contrary -- these
businesses have high margins, which may one day help them become
attractive investments.
But to me, it's clear that these stocks are still one of the
riskiest places for your money right now.
I don't know about you, but I don't like to take big risks with my
money. I don't want to invest in a company that "could" hit it big
as long as everything goes to plan. I want to own companies that I
think will make money almost no matter what happens. And I want to
own companies showing they put investors first.
Action to Take -- >
That's why I believe the best way to get wealthy in the stock
market is by owning companies that dominate their markets, are
essential to our way of life, and that continually reward their
shareholders with dividends and share buybacks.
When you start looking into the new breed of Internet stocks, there
are few of these traits to be found.
[
Note:
For companies that dominate their markets and put investors first,
don't miss my latest presentation --
Forget Facebook... Buy This Instead
. I've identified 10 market-dominating companies that you can buy
today, and basically hold for the rest of your life... including
one company that holds more than $130 per share in cash on its
books (and it's not Apple). To read more,
visit this link
.]
-- Paul Tracy
Paul Tracy does not personally hold positions in any securities
mentioned in this article. StreetAuthority LLC does not hold
positions in any securities mentioned in this article.