Gems in the Internet Bargain Bin?

With some dot-coms showing they have the chops to survive as real businesses, S&P pinpoints some undiscovered nuggets

By Numer de Guia

Some Internet companies have successfully shed the dot-com stigma, proving themselves to be real, profitable businesses. And investors have responded in kind: Stocks of some leading companies in the group have performed well year-to-date. Yahoo! (YHOO ) and eBay (EBAY ) are good examples, with stock returns so far of 55% and 39%, respectively, thus far in 2003.

The industry's leading lights, however, continue to trade at stratospheric valuations. That gave us an idea: How about looking for Internet companies similar to these but that still trade at a bargain relative to earnings? The point would be to find these "undiscovered" gems before their prices rise and fully reflect their underlying economic strengths.


  So for this week's screen, we at Standard & Poor's sought out currently profitable Internet-based companies and Internet retailers, based on data provided by Compustat. Profitability is defined as positive 12-month basic earnings (before extraordinary items) and positive 12-month cash flows. Penny stocks, which largely tend to be speculative, were deliberately excluded from the selection process. Only shares priced above $5 a share were included in the pool.

Then came the bargain-hunting part. Of the stocks that passed those filters, we sifted for the 10 with the lowest price-to-earnings ratios, based on earnings over the past 12 months. Here they are, in ascending order:

Undiscovered Internet Bargains?
Company name/ticker Price-to-earnings ratio
Crayfish (CRFH ) 7.0
Overture Services (OVER ) 11.4
Bankrate (RATE ) 15.0
Websense (WBSN ) 17.0
WebEx Communications(WEBX ) 18.1
Onesource Information Services (ONES ) 18.7
PEC Solutions (PECS ) 19.4 (FWHT ) 20.1
Open Text (OTEX ) 24.5
LendingTree (TREE ) 24.9

DeGuia is a portfolio services analyst for Standard & Poor's

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