Markets

What's the Best Internet Stock for the Summer?

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"Internet stock" is a reference to a rather broad spectrum of companies that depend on the Internet for revenue. This includes content providers, platform providers, data aggregators and various other facilitators including software makers.

Here I'm narrowing it down to Internet retailers including platforms like Amazon AMZN and eBay EBAY , daily deal providers like Groupon GRPN , retailers like Petmed Express PETS , Blue Nile NILE and CNOVA NV and travel booking service providers like Priceline PCLN and Expedia EXPE .

The secular drivers for this market in the last few quarters have been and continue to be mobile device adoption and the transfer of offline shoppers to online channels.

In fact, free shipping is now the norm in most cases and the convenience of armchair shopping with no waiting lines and no load to carry have also pretty much been taken for granted. Feedback from other shoppers is also easily available, further easing the purchasing process.

Adding to these very strong drivers are social networking platforms like Facebook and Twitter and other online players like Alphabet's Google that create online real estate for advertising and also supply effective tools that help advertisers track the ad to the sale (direct-response ads are one such format). So online retailers can generate traffic from Internet users on other services through the ads they place on the web. And netizens continue to increase as a natural corollary to mobile device adoption.

The question that arises then is the sustainability of this model. It's obvious that not all sales will move online. Online retailers are damaging traditional retailers, many of which have however been building goodwill and customer relations. Some customers also prefer to look and feel the things they're buying and the personal touch that friendly sales staff bring.

But the items being sold online are also increasing as customers are increasingly comfortable buying high-value items online. Additionally, online retailers have greater access to customers because of the Internet so selling internationally has become much easier, especially with platforms like Amazon that facilitate sales. So growth can slow down but isn't about to go away.

Zacks Rank

Choosing a stock in a market with a large number of variables can be tricky. But when you've got the Zacks Rank as guide, you need look no further.

Stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) have a good chance of appreciation within the next month or so. So adding them to the portfolio can lead to short term gains.

Unfortunately, most of the companies in the sector have various issues and therefore can't be recommended. Also, the sector being in growth mode means that valuations might not make a whole lot of sense.

Randomly picking up and comparing companies we find that some have posted strong earnings surprises over the past year. However, they all have Zacks Ranks of #3 (Hold) or lower (meaning Sell rated) a low VGM score (meaning that neither value nor growth nor momentum investors would fancy them!).

One stock stands out, however, and that is Petmed Express. So that's the one we are highlighting today.

Petmed Express

Petmed Express is America's largest pet pharmacy, delivering prescription and non-prescription pet medications and health and nutritional supplements for dogs and cats at competitive prices direct to the consumer through its 1-800-PetMeds toll free number and on the Internet.

The company reported fourth-quarter results on May 9, but despite an initial positive reaction to the news, shares have fallen off slightly since then. Results nonetheless are positive, showing revenue, earnings, new orders, re-orders and average order value growth from the year-ago quarter. Customer acquisition accelerated to 116K from 97K a year ago.

Management attributed the results to the unseasonably warmer weather that helped flea and tick demand. Most significantly, customer acquisition cost was down from $42 to $32. Another positive is the balance sheet where the company has a healthy cash balance and no debt. This might be something that will change in the future though as it moves to expand its online advertising and sales.

The best part of all: Petmeds has a Zacks Rank #1. Its 1.16 beta indicates relatively low risk. Moreover, our value style score for the stock is B, so value investors might want to accumulate the shares.

PETMED EXPRESS Price and EPS Surprise

PETMED EXPRESS Price and EPS Surprise | PETMED EXPRESS Quote

Conclusion

The online retail sector isn't so hot right now but if you're keen on exposure, you should stick with the basics. Take a look at the Zacks Rank and Zacks Style Scores and you're set.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

PETMED EXPRESS (PETS): Free Stock Analysis Report

EXPEDIA INC (EXPE): Free Stock Analysis Report

PRICELINE.COM (PCLN): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

EBAY INC (EBAY): Free Stock Analysis Report

BLUE NILE INC (NILE): Free Stock Analysis Report

GROUPON INC (GRPN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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