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Originally published May 8, 2014 at 6:07 PM | Page modified May 9, 2014 at 7:04 AM

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Internet stocks fall out of favor as investors grow nervous

Internet companies, whose market values ballooned in 2013 amid high hopes, have pulled back in 2014 as investors reassess their prospects. Into this environment comes Hong Kong tech giant Alibaba with its big IPO plans.

The Associated Press


NEW YORK — It’s a tough time for a tech debut.

As e-commerce giant Alibaba gets ready for a blockbuster stock sale in the next few months, technology shares are retreating.

For two years, investors bid up biotechnology and Internet companies, enticed by their strong growth prospects in an otherwise weak U.S. recovery.

But they have sold off those stocks since late February, realizing they can find better value elsewhere.

So-called growth stocks like Amazon and Groupon are out of favor. Companies that pay healthy dividends and have a long record of profitability, like utilities, are in.

Seattle-based Amazon has dropped 28 percent since the beginning of the year; Netflix is off 13 percent. More risky dot-com companies such as Groupon have plunged more than 50 percent.

Into this brutal environment comes Alibaba, a company that propelled the rise of online shopping in China and is preparing an initial public offering that could become the biggest in U.S. history.

It’s not an optimal time to pitch tech. Internet companies, whose market values ballooned in 2013 amid high hopes, have pulled back as investors reassess their prospects.

Twitter, which held its IPO last November, peaked at $74.73 a month later. But the stock is down more than half from that high, including a plunge Tuesday after company insiders were allowed to sell stock for the first time since the offering.

Roughly $149 million has been pulled out of science & technology funds the last two months, according to mutual-fund data provider Lipper. Over the same period, about $5.2 billion has flowed into value-focused mutual and exchange-traded funds.

The lopsided moves show that investors are skittish about tech.

Tech is the highest-profile casualty of a fundamental shift in investor behavior, market watchers say. Instead of putting money in growth stocks — companies whose earnings rise at above-average rates — fund managers now want shares of safer companies.

Instead of hunting for stocks whose prices could double this year, investors want so-called value stocks, companies that are undervalued by the market but pay relatively high dividends, sell necessities, and have mature business models.

“They’re killing everything high-growth,” says Ian Winer, director of trading at Wedbush Securities. “It’s the same story, no matter what company you look at. Investors want out.”

What they want are utilities, energy and health care. As a result, the three are the best performing industries in the Standard & Poor’s 500 index this year — up by 13, 5 and 4 percent, respectively. By comparison, the S&P 500 is up 2 percent.

Despite the tough conditions for Internet stocks, most analysts expect Alibaba’s IPO to raise at least $10 billion. The figure to beat is Facebook, which brought in $16 billion when it went public in May 2012.

“It might be safer for Alibaba to do a more conservative pricing of its IPO in this environment,” says Kevin Landis, portfolio manager of Firsthand Funds. He would consider buying Alibaba after its IPO, saying that the company will benefit from the explosive growth of online shopping in China.

The recent skepticism about tech companies is a reversal of the last two years.

Money poured into high-growth tech companies starting in 2011 because they were the only parts of the economy that seemed to be expanding, market strategists say. Netflix and Amazon were posting double-digit sales growth while nontechnology companies were eking out profits by cutting costs.

“Many flocked to a few areas — including social media, cloud computing and biotechnology — of the market where high growth seems well assured,” says Ed Cowart, portfolio co-manager at Eagle Asset Management. “(But) concentrated and aggressive interest drove those stocks to dizzying heights.”

Besides high prices, another trend has drawn investors’ away from Internet stocks. Nontechnology companies are starting to see modest increases in sales and profits.

Evidence is also emerging that overall U.S. growth is picking up after a tough winter.

“If the economy is getting better, big traditional large-cap stocks are going to look pretty cheap,” says Bob Doll, chief equity strategist at Nuveen Asset Management.

Greenlight Capital’s David Einhorn, the hedge-fund manager who correctly called the collapse of Lehman Brothers, says technology stocks are in a bubble that is an “echo of the previous tech bubble” in 2000.

He thinks that these “bubble stocks” will fall further, although he did not disclose which companies they are. “While we aren’t predicting a complete repeat of the (dot-com) collapse, history illustrates that there is enough potential downside in these names to justify the risk of shorting them,” or betting that their stock prices will fall.

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