Analyst Sees Some Vulnerability Ahead for ‘E-Tailers’

Merrill Lynch & Co. analyst Henry Blodget said Wednesday that Internet companies that focus on selling to consumers could decline after the first of the year as investors focus on the increasing competition in the industry.

In a conference call with the firm’s sales force and a written report to clients, Blodget did not mention names of stocks that he considers vulnerable to declines.

Instead, he said investors should focus on companies that are gaining market share and have strong international operations, including Yahoo Inc., America Online Inc., DoubleClick Inc. and Amazon.com Inc.

No. 1 search service Yahoo surged $16.13 to $228.88, while America Online, the world’s largest Net access provider, rose $3.25 to $76.13.

“We would be most concerned about weaker companies in the ‘e-tailing’ group, some of which have benefited along with the leaders from the general enthusiasm around the holiday season,” Blodget wrote.

Top Internet advertising company DoubleClick jumped $10.38 to $170.44, while Amazon.com, the largest online retailer, eased 6 cents to $85.

Merrill Lynch recently ranked the following as “first-tier” Internet consumer companies: Amazon.com, Barnesandnoble.com Inc., EBay Inc., EToys Inc., Homestore.com Inc. and Webvan Group Inc.

Web companies with established brand names, such as Yahoo and Amazon, will hold up best if the Internet sector falls, Blodget said.

Blodget, who has often recommended that Internet investors buy “a basket of the best stocks” to limit risk, shot to prominence a year ago when he predicted Amazon would reach $400 a share, a target it quickly burst through on a split-adjusted basis.

In Wednesday’s report, he said business-to-consumer stocks have surged since August in anticipation of a strong holiday season, “and the strength may well continue for another month or more.”

“At some point, however, we expect to see the group pull back as investors focus increasingly on [the first quarter], increasing competitive pressures and a lack of catalysts as we move out into the spring.”

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On Fire

The volatile shares of Industry-based apparel seller Hot Topic have surged 235% this year. Monthly closes on Nasdaq since December 1996, and latest:

Wednesday:

$43.13