Internet Stocks: Look Beyond Yahoo

Key Points:

• Despite the resignation of Jerry Yang, forecasts are trending downward for Yahoo
• Other Internet companies are doing well, however, such as Sohu.com and United Online

Without Merger, Few Positive Catalysts For Yahoo Over The Short-Term

Yesterday, Yahoo (YHOO - Analyst Report) announced the resignation of Jerry Yang from the CEO post. The announcement was met with cheer as shares rose by nearly a buck to $11.55.

Playing a role in the upward move were speculators hoping for renewed merger talks with Microsoft (MSFT - Snapshot Report). The problem is that there is no guarantee that a merger will occur.

Without a merger, there are few catalysts for the stock. Naming a well-respected outsider as a CEO might help, but the company is struggling with both tough competition and a weak economy. During the past 30 days, 17 brokerage analysts have lowered their 2009 profit projections.

There Are Attractive Internet Stocks

Despite the problems with Yahoo, Internet Services is among the top 50 industry groups. This group contains 1 Zacks #1 Rank ("strong buy") stock, United Online (UNTD - Snapshot Report), and 7 Zacks #2 Rank ("buy") stocks, including Sohu.com (SOHU - Analyst Report).

Overall, stocks within the better-ranked groups tend to outperform the markets. And while investors might be inclined to look at the top 10 or 20 groups, stocks within the top 80 groups can be viable investment candidates.

Games Score High For Sohu.com

Sohu.com operates a leading web portal in China, while also providing various other Internet and wireless services, such as online gaming.

SOHU's third-quarter earnings of $1.02 per share were 11 cents above expectations. (The company has now topped expectations for 6 consecutive quarters.) Revenues more than doubled to $120.7 million, thanks to an 18% rise in advertising revenues (the Olympics helped) and a 330% increase in gaming revenues.

The company projected fourth-quarter profits to total $1.20 per share, which was 10 cents above the then consensus earnings estimate. Analysts have not only raised their forecasts for the current quarter, but also upped their predictions for 2009 earnings. The consensus estimate now calls for profits to total $4.75 next year, a 12-cent increase over the average forecast of a month ago.

United Online Blossoms

United Online may be best known in the U.S. for its social networking web site Classmates.com and low cost ISP NetZero. Thanks to last August's acquisition of FTD Group, Inc., the company also operates the largest network of florists.

UNTD matched third-quarter expectations with profits of 22 cents per share. Revenues rose 33% to $169.2 million, thanks to the inclusion of FTD. Classmates generated growth of 18%, though the company's communication segment struggled.

Following the earnings report, the 2 covering brokerage analysts raised their 2008 and 2009 profit forecasts. The 2008 consensus earnings estimate of $1.02 per share is 14 cents higher than the average forecast of a month ago. The 2009 consensus earnings estimate of $1.26 per share is 42 cents above the average forecast of a month ago.

Short-Term Outlook Changes for Baidu.com.

The third-quarter numbers from Chinese language search engine Baidu.com (BIDU - Snapshot Report) also looked good. The company earned $1.46 per share, 22 cents better than analysts had forecast. Revenues rose 85% to $135.4 million. More advertisers signed with the company and revenues per customer rose. Again, the Olympics helped.

The majority of the covering brokerage analysts raised their 2008 and 2009 projections in response.

Given this backdrop, BIDU would seem to be another Internet-related candidate. However, a press release from the company removed some of the luster from the stock, at least over the short-term.

Following a news report, Baidu.com admitted to accepting paid listings for certain popular medical terms from medical companies that did not hold the proper licenses. BIDU has removed the paid listings in question until the advertisers can show proof of the proper licenses.

Baidu estimates that the customers in question accounted for 10% to 15% of total revenues. It is unclear how much of the revenues will be recovered in the future, though 1 analyst has already reversed course and cut his profit forecasts for the remainder of 2008 and all of 2009. It is possible that more analysts will cut their forecasts going forward.

Related

There are various ETFs that have exposure to Internet companies, but many also include network equipment companies. Possibly the "purest" ETF is the Internet HOLDRS (HHH). This fund's largest holdings include portals, ecommerce and online brokerage firms.

There are no specific funds that target generic drug makers.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.