AOL Joins An Elite Club
America Online's elevation to the S&P 500 group of stocks Wednesday lifted the Internet sector, with AOL alone climbing more than 18 points on the momentous event before slipping back in afternoon trading.
The Amex Internet Index rose 2.2 percent, leading the advance in the broader technology sector. The Goldman Sachs Internet Index jumped 4.5 percent. The tech-heavy Nasdaq rose 15.65 points to 2,136.63.
AOL (AOL) climbed more than 10 points late Tuesday in after-hours trading and rose to a peak of 141 early Wednesday, up from its 122 7/8 close on Tuesday at the New York Stock Exchange. Analysts attributed the rise solely to AOL's inclusion in the popular S&P 500 Index ($SPX).
Huge sums are tied to index funds, where managers passively buy all of the stocks in an index such as the S&P 500, which contains the largest U.S. companies.
In another technical play, Netscape (NSCP) pumped 6 7/8 higher to 58. That's because AOL is buying the software company.
Venator (Z), on the other hand, dropped 11/16 to 6 1/8 on the news. Venator, the former Woolworth, is being bumped by AOL on the index.
AOL's rise to the S&P means more than a classic technical play for index portfolio managers, some analysts say.
The S&P's switch from an old-time retailer to a pure Internet play signifies the rise of the whole online sector. This is happening even as the sky-high valuations of most stocks in the group come under heavy attack.
"This is significant because (the addition of AOL to the S&P) happened in such a short period of time," said David Takata, technology sector analyst at Gruntal. "If this is what happened, you can see a number of companies could continue on that kind of trend line. (AOL) will be joined by others -- Amazon and Yahoo come to mind as the most likely other candidates."
Online bookseller Amazon.com (AMZN) rose 3/8 to 322 2/4 and portal Yahoo! (YHOO) was up 2 7/8 to 247 7/8.
"You will definitely start to see some of the largest Internet stocks (join key indices) as we move forward," agreed Pawan Malhotra, Internet analyst at Legg Mason. "This is the leading sector."
Yet while the crafters of the S&P 500 may want to bring other Internet stocks aboard, one "small risk" Malhotra notes is that the Net stocks might underperform next year after posting such stellar returns this year.
Investors climbed onto the Internet auction bandwagon for the third day in a row. Ubid (UBID) screamed 39 1/4 higher to 173 3/4. Shares of eBay (EBAY) reversed earlier declines and rose 3/8 to 301 in choppy trade and 3/8. Onsale (ONSL) rose 2 15/16 to 66 15/16.
"If you can justify (the online auction sites) at those prices, I've got to think Onsale still remains very cheap," said Malhotra. The trick, of course, is to swallow the valuation put on newcomers like Ubid, now at $1.6 billion.
"The last thing you want to do is to short an Internet stock," he added. "If yu don't want to buy, fine. But don't get caught on the other side. It's a dangerous game."
Meanwhile, Zapata Corp. (ZAP) got a 100 percent pop at one point during the day after the fish food maker said a subsidiary plans to "re-launch its Internet initiative which will focus on the development of an Internet-related brand name and network of sites."
Shares of Sharper Image (SHRP) also rose -- 3 1/8 to 16 -- in the wake of higher Internet-related sales this holiday shopping season. Xoom (XMCM) rose 7 points to 41 7/8.
In another e-tailing play, Multiple Zones International (MZON) rocketed as much as 163 percent after the online merchant said its zones.com site has opened an auction site.
Among the other Net stocks, online brokerage E-Trade (EGRP) rose 5 5/16 to 43 3/4, boosted partly by a ratings upgrade from Abn Amro. Ameritrade (AMTD) rose 1 3/8 to 35 1/2 on the heels of a big rise Tuesday after the owner of online and traditional brokerages said it expects to exceed Wall Street's earnings' expectations by as much as 5 cents a share due to increased transactions on its Web sites in December.
Online brokerages kept their strong gains as well: E-Trade (EGRP) jumped 5 1/6 to 43 1/2 and Schwab (SCH) gained 1 7/8 to 57 5/16.
By Emily Church