Surf net shares with eyes open

By THIS IS MONEY
Updated:

 

The boom in internet shares has lured many investors into believing that web companies are the way to an easy fortune. But they should tread carefully.

Trading in internet stocks was wild in the run-up to Christmas and the boom looks likely to continue despite a minor correction.

But for every Freeserve, now trading 300% up at 622 1/4p since its flotation at 150p in July, and QXL, up more than 450% since it floated in October, there are plenty of failures. In the US, where the boom first materialised, about 50% of web company shares are trading below flotation price.

Working out which will be the winners and losers is no easy task. Justin Urquhart-Stewart of Barclays Stockbrokers says: 'With internet firms there are no traditional measures to work on, such as a company's history.'

But there are some points to bear in mind before investing.

Jim Rose, 38, is chief executive of QXL, the first online auction house. When it floated on October 7 the shares were 195p. Now they are 1110p. He says there are four criteria that investors should consider when buying internet stocks.

'The first is the market the company is going after. Investors should find out whether it is viable.

'Second, it is important to look at whether the company is filling a need.

'Then it's worth looking at the people running it. Sometimes it is a couple of college kids with a great idea but no business experience.

'I was brought in at QXL because the founder, Tim Jackson, is a journalist and the company could not have gone public with him at the helm as he did not have a business background.'

Rose has a business degree and worked for a number of Footsie 100 and Fortune 200 companies.

The final factor is competition. Rose says: 'In some sectors there are so many websites that the market is in danger of becoming overcrowded.'

QXL is one of the few web companies in Europe to have floated. One that will float later this year is Last-minute.com, which sells flights and holidays. Founder Brent Hoberman, 31, says investors should look for companies with 'a great idea, rapid execution and global potential'.

For most investors who would like to be in on the internet revolution, a fund investing in a number of internet companies may be a safer option.

Urquhart Stewart says: 'A number of funds, such as Framlington Net and Henderson Technology, invest in net companies and they are run by people who understand the internet.'

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