The story starts nearly two decades ago when early Internet businesses like Cisco (1990) and America Online (1992) were going public. Back then, investors didn't recognize an Internet sector; Cisco was in the business of making routers (I remember writing about them before using them), while AOL was a service for people playing games. The World Wide Web came later.
Investors, noting these stocks, would have found Cisco categorized as a maker of electronic hardware, like old-timer Raytheon, and AOL categorized, perhaps, with Mattel in the game industry.
By the mid-90s, however, Wall Street was catching on, and analysts created the Internet sector as a catchall for these companies that were building new businesses where none had been imagined before. With the sector identified and labeled, its progress became measurable, and the outstanding progress of the stocks in the sector proved a magnet for more money.
A little later, Netscape and Yahoo! arrived to battle for the attention of the masses.
As the money rolled in, more companies were created and taken public, and before long, the Internet sector was crowded with stocks. Some developed hardware, some provided connectivity, some provided security and some provided content. But they remained commingled in that catchall Internet sector until the late-90s, when their numbers grew so large that they were separated into sub-categories.
Then, in early 2000, just when the fellow who cuts my hair was talking up his investment in EMC, the party ended.
Back in April 2000, one month after the official market top, (though I had no idea how big a top it was) I chose to preserve a record of the occasion by saving some data on the sector.
At the time, our database held 470 Internet stocks in four sub-sectors. A year later, even though times were getting tough, more had been born than died; there were 521 Internet stocks!
And then the great attrition began. By April 2002, the number of Internet stocks was down to 329. By April 2003, it was down to 229. And by April 2004, it was down to 206. Today, in our database, there are 159 Internet stocks in five sub-sectors. In short, the number of Internet stocks has shrunk 70% since 2000.
The healthiest sub-sector of the group today (and that's not saying much) is Internet Content, where we find Baidu.com (NSDQ: BIDU), the Google of China, and Sohu.com (NSDQ: SOHU), the Yahoo! of China. The domestic players in the sector are substantially weaker, though Google (NSDQ:: GOOG) may be the best of that bunch.
There are a few good-looking stocks in Internet e-Commerce, as well. The best-looking are Priceline.com (NSDQ: PCLN), which is hitting new highs, and MercadoLibre (NSDQ: MELI), the Ebay/Amazon of Latin America.
The Internet ISP sector is fascinating, in part because there are only 14 public companies left in it. The only one that's even halfway attractive is Premiere Global Services (NYSE: PGI), which provides a wide variety of Internet-based corporate communication services.
In the Internet Network Solutions sector, the one chart worth watching is AsiaInfo Holdings (NSDQ: ASIA), which provides software and security products to telecommunications companies in China.
Finally, in Internet Software, where we find CMGI Inc (NSDQ: CMGI)-we remember when the name briefly graced the New England Patriots' stadium-nothing looks good.
So what do we learn from all this?
First, the early days, when a sector is still uncategorized and indistinct, provide investors the best investment opportunities.
Second, the number of companies in the sector peaks after the stocks themselves peak.
Third, the shrinkage can persist for a very long time. (Note that the number of companies in the domestic automobile industry has shrunk from hundreds to a handful.)
Fourth, and perhaps most important today, if you want to play in the Internet sandbox again, you should recognize the advantage inherent in the fast-growing Chinese market.
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So how do we relate this knowledge to the alternative energy industry?
We start by looking at the well-established oil and natural gas industry, where we find a whopping 451 stocks pigeonholed in 12 distinct sectors, from Canadian Exploration and Production to Field Services to Refining/Marketing to Transport/Pipeline to U.S. Royalty Trusts. The sector is mature, well-defined and well-researched, so there are few big surprises.
Yet the rising price of oil is a powerful lever, and because of it, some of these stocks are doing very well; we've recommended some of the smaller, faster-growing companies in Cabot Market Letter and Cabot Top Ten Report.
But yesterday Michael Cintolo told me something interesting. He said that while the smaller oil and gas companies are in hog heaven because they've been able to expand their drilling operations substantially, the larger players haven't been able to do the same, because it's increasingly difficult to find new large oilfields!
In fact, a look at the three biggest oil companies, Exxon (NYSE: XON), Petroleo Brasileiro (NYSE: PBR) and Petrochina (NYSE: PTR) reveals revenue growth in the latest quarter of just 34%, 33% and 31%, and that's mainly from higher prices. These big boys are having a hard time finding meaningful amounts of oil!
Alternative Energy Industry Is Still Small
And this observation ties into the concept of Peak Oil, which I wrote about recently, and which has heightened my interest in alternative energy investments.
The alternative energy industry is still very small, and thus quite capable of growing rapidly as the world seeks out economically attractive alternatives to high-priced fossil fuels. But when I look for our vendor's Alternative Energy sector, what do I find? There isn't one! There's simply a catchall called Energy-Other, which holds 82 stocks today.
So I examine these 82 "Other" energy stocks and I find that twenty of them are coal stocks! The only thing alternative about coal is that it's older and dirtier than oil and gas!
Among the remaining 62, I count 16 solar power stocks, 8 bio/waste stocks, 7 fuel cell stocks, 7 uranium/nuclear stocks and 5 ethanol stocks, with the remainder distributed among geothermal, hydroelectric, other electric, hydrogen, propane, batteries, wind, ocean and methane.
So what are we to make of this tangled information? We're to remember the first lesson from my Internet story above, "The early days, when a sector is still uncategorized and indistinct, provide investors the best investment opportunities."
Eventually, I expect this category of Energy-Other to be subdivided; coal stocks and solar power stocks should get their own categories, and if another sector proves to be the magic bullet that shrinks our demand for oil and gas, it too will graduate to stand alone. In the meantime, this catchall category is likely to spawn some very big winners ... but it will take work to find them.
Editor's Note: Last year, Cabot Market Letter subscribers made a raft of money investing in First Solar (NSDQ: FSLR), the king of the solar power sector, and editor Michael Cintolo continues to hold the stock, with a profit of nearly 400%. But he's been working hard in recent weeks to find the next First Solar-the next undiscovered stock with great fundamentals and a high-potential chart-and with the broad market on firmer ground in recent weeks, he's been adding some of these stocks to his Model Portfolio. According to Hulbert Financial Digest, which monitors hundreds of newsletters, Cabot Market Letter is the fourth-best performer of all investment advisory services over the past 12 months, with a return of 36.7%. Over the past five years, it's brought subscribers a compound annual return of 15.8%, while the Nasdaq composite is up 10.0% and the S&P 500 is up just 8.7%. To get started with a no-risk trial subscription, simply click the link below.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory