Buy These 5 Internet Stocks Before Someone Else Does

Warren Buffett opened his wallet to buy stakes in leading American companies late last year, but it wasn't enough. Now it's time to see if the same approach can bail out the Internet sector.

JPMorgan analyst Imran Kahn believes that there will be a flurry of buyout activity in this space over the next two years. His theory is solid. The country's largest Internet companies have tens of billions of dollars collecting measly interest on their balance sheets. Smaller Internet stocks have fallen harder in the market's downturn, making them more attractive value propositions.

The clincher, of course, is that many of the dot-com bellwethers are struggling to milk growth out of their organic operations. Since most of these companies appear to be in no hurry to aggressively repurchase their shares or distribute meaningful dividends, a shopping spree seems like a beauty way to go.

Who will get bought?
Kahn offers up several publicly traded names that make tempting targets:

  • Omniture (Nasdaq: OMTR  ) -- Online analytics is a specialty that may be rarely embraced by consumers, but it's fertile turf for the growing number of companies setting up camp in cyberspace. A Web behemoth like Google (Nasdaq: GOOG  ) would be a natural to buy Omniture as a way to diversify its revenue mix away from online advertising.
  • MercadoLibre (Nasdaq: MELI  ) -- Latin America's largest online marketplace owns Brazil, Argentina, and Venezuela when it comes to consumer-to-consumer transactions. It would look great on the arm of any Internet company looking to matter more in South America, even if it isn't into virtual marketplaces at the moment.
  • Shutterfly (Nasdaq: SFLY  ) -- The digital photo-finishing specialist has struggled against low-cost photo specialists and home printing lately, but its hardbound Photobooks are still amazingly popular keepsakes. Social-networking sites with greenbacks to spend would be nuts to pass on the opportunity to snap up a company that can really move the needle on social-networking revenue.
  • The Knot (Nasdaq: KNOT  ) -- It’s the country's leading wedding resource site. Couples may be scaling back on how lavish their special days will be -- or bumping the rites entirely -- but The Knot is still growing. Search engines crave big-ticket keywords, and The Knot attracts audiences ready to spend a lot of money.
  • Expedia (Nasdaq: EXPE  ) -- Sure, priceline.com (Nasdaq: PCLN  ) is getting all of the attention these days as the faster-growing travel portal, but Expedia still has the girth and global reputation to matter. 

Kahn is particularly keen on the first two -- Omniture and MercadoLibre -- being snapped up, but suggests that all of them make worthy targets. I wholeheartedly agree.

Silent but deadly
The logical shopping spree doesn't need to include public companies. Because of the prolonged drought in the IPO market, several of the Internet's biggest rock stars have yet to go public.

Facebook and Twitter are media hogs these days -- and should fetch respectable ransoms -- but the list doesn't end there. Smaller players like white-collar social-networking site LinkedIn and news aggregator Digg may be tempting nibbles for companies running out of organic growth ideas.

The key for investors is that when the buyout wave starts, it's going to be set off like a Rube Goldberg machine. Once a dot-com bellwether blinks, its peers will follow quickly with their own buys before speculators drive up share prices.

This makes today a compelling -- though naturally quite risky -- time for individual investors like you and me. Do you start buying the smaller companies that fit perfectly into a larger company's master plan today, or do you wait for proof that the shopping spree is actually taking place, even if it means paying higher prices?

It's a risk-reward dilemma that every growth-stock investor faces at the moment.

The disruptors should be disrupted
It's no surprise to me that several of Kahn's buyout picks happen to be active picks in our newsletters. Rule Breakers is a premium research service that specializes in singling out promising stocks that are early in their growth cycles.

These companies are disruptors, in many cases quietly reinventing industries that many investors have left for dead. If you're Google, why wouldn't you want to buy up The Knot? It would open up new outlets to grow in local search, delivering meaty leads to wedding service and honeymoon travel providers. If Facebook is criticized for lacking online monetization, it could do worse than shacking up with Shutterfly, given the photo-sharing popularity on the site.

Even if you decide not to buy young dot-com upstarts today, start to assess the playing field. Seek out the names that are likely to be acquired at a hefty buyout premium. Learn to avoid the ones that will be left behind.

The time for due diligence is now, not when the Rube Goldberg machine starts rolling.

More stories to brush up on during the lull:

MercadoLibre is a Motley Fool Global Gains pick. Google and The Knot are Motley Fool Rule Breakers recommendations. Omniture and priceline.com are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz embraces disruptions and lives for opportunities. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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