By James Altucher
I can live all day inside the Internet. I can talk to my friends, listen to music, watch TV, trade stocks, play games, do work – all on the Internet. From 6 a.m. until 10 p.m. every day I can spend on the Internet and it would be a day well spent.
But run for the hills when it comes to advising clients to invest in the Internet.
The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I’m not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.
Don’t just ask me. Ask the best. Nobody can figure out a business model.
Time Warner would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. is shaking up its MySpace business as it figures out its next steps. (News Corp. owns Dow Jones, publisher of this newswire.) Microsoft has spent billions on Internet strategy without a dime of profit. And even Google can’t seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.
What about the nuts-and-bolts guys? Cisco, at 15 times earnings, trades in line with the S&P 500. Buy them when they start giving a steady dividend.
Let’s face it. Electricity greatly improved our quality of life. But I’m not going to get excited about buying a basket of utility companies. Same for the Internet. Can’t live without it, but can’t live with it (in my portfolio).
So what do we do?
In this economy, it’s back to the basics. Regardless of how you feel about $1 trillion in stimulus (with more probably on the way), the best growth is going to come from the companies that help us spend that stimulus.
Check out LNN, Lindsay Corporation, that does boring stuff like highway repair (they make those orange cones) and helps upgrade water infrastructure. With half of all hospital beds in the world filled by people with dirty water-related illnesses, this one is a good bet.
Or little known Colfax Corporation, CFX. At nine times forward earnings, this company is in the “fluid handling” business. Boring. But in a resource-starved world we need them to get oil quickly through the pipelines and into the refineries. And we can’t forget about ASTE, Astec Industries, which is like the “Amazon of Asphalt” and is a major player in highway repair (think stimulus again).
The exciting plays right now are the companies that are rebuilding the country along with the economy. Save the Internet for your iTunes downloads. But focus client portfolios on the future. Next article: my favorite biotech plays.
James Altucher is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies.
