Don't Turn Your Back on Internet Stocks

Morgan Stanley's iconic Mary Meeker is turning her back on a handful of online companies. She's removing her firm's rating on five small- and mid-cap dot-coms. It seems to be pretty lousy timing given the sector consolidation taking place and the acquisitive attractiveness of many of the companies that are coming off the analyst's ratings grid.

Let's go over the five companies being moved to the "Not Rated" pool.

• Overstock.com (Nasdaq: OSTK  ) is an e-tailer that buys closeouts and clearance items, selling them through its namesake store at bargain prices.
• drugstore.com (Nasdaq: DSCM  ) is another e-tailer that made it through the dot-com bubble bursting. It sells health, beauty, vision care, and pharmacy items.
• MercadoLibre (Nasdaq: MELI  ) is Latin America's largest online marketplace. eBay (Nasdaq: EBAY  ) owns a minority stake in the company.
• Dice Holdings (NYSE: DHX  ) runs several community hubs that ultimately deliver job listing leads to potential employers.
• Digital River (Nasdaq: DRIV  ) is an enterprise service provider that builds, manages, and grows e-commerce businesses.

In Meeker's defense, she isn't just arbitrarily tossing out smallish names. Dice and MercadoLibre are being singled out for valuation concerns. Meeker has problems with the competitive climate for the other three models.

However, this is the wrong time to strip these companies of their ratings. Salary.com and Internet Brands were acquired at healthy premiums last month. I wouldn't be surprised if one or two of these five rating discards get snapped up over the next few months.

MercadoLibre, Dice, and Digital River fit the profile of recent acquisitions. Overstock.com and drugstore.com may be tempting targets for real-world retailers hoping to offset bricks-and-mortar weakness with some Web-based sizzle.

No self-respecting analyst would continue rated coverage solely based on the possibility of a buyout, but it's an indicator that interest is certainly warranted in this space -- and that includes the smaller companies that make the more logical acquisition targets right now.

Are you buying Internet stocks these days? Share your buy or sell list in the comment box below.