Internet speculators rush for smaller and riskier stocks

Just when you thought the Internet stock craze could not get any, well, crazier, it did

Just when you thought the Internet stock craze could not get any, well, crazier, it did. Many investment pros already were aghast at the huge jumps in recent weeks made by big-name Internet-related stocks with little or no profit, such as Yahoo! and Amazon.com.

But at least with those stocks, Internet bulls could defend their enthusiasm by pointing out that the companies are industry leaders with the best prospects for success.

This week, however, smaller and far riskier stocks sky-rocketed on enormous share volume as investors lunged at virtually any Internet name. A few examples: A day after announcing a deal with America Online, stock-research company Market Guide almost tripled in price to $23 (£17).

Meanwhile, 7th Level surged more than fivefold to 91/4 on news that its character-animation software will be distributed by a network and data company.

READ MORE

But it did not stop there. In a sign of how frenzied the buying has become, obscure penny stocks took off without releasing any news. Alpha Microsystems, a software company, climbed 55 per cent to 2.81.

In other cases, the stock warrants of some Internet companies took off. A warrant gives a holder the right to buy stock at a specified price in the future.

Apparently, some investors did not want to pay rising prices for the stocks themselves so they latched onto lower-priced warrants.

For example, shares of Online System Services rose a relatively modest 21 per cent to 14.31 but its warrants did twice as well, closing up 42 per cent at 3.38.

Instances like this are what Wall Streeters refer to as "blow-offs", as small and unproven stocks rise in a speculative orgy.

But because the rallies are based more on hype than the fundamentals of the companies, the mania later reverses course and leaves many investors with losses.

"It'll end very badly with a big bust," said Michael Murphy, editor of the California Technology Stock Letter. Even more worrisome, individual investors are likely to be players in the Internet rally. Flush with big profits from the bull market, many people now believe they can make money easily in this market.