6 Rules for Investing in Internet Stocks and 8 Promising Picks

Kiplinger's Personal Finance,

Ever since Al Gore (or whoever) invented the Internet, entrepreneurs and investors have been trying to find ways to profit from it. Few investment activities are more fun than picking Internet stocks -- fun, risky and, sometimes, fulfilling. In 2002, I invested in the stock of Netflix (symbol NFLX) shortly after the film-rental company's stock went public at $15. I loved its Big Idea: videos, ordered online, that you could keep as long as you wanted and return by mail, to be replaced by new titles. The business was deliciously simple; at the time, anyone could do the arithmetic and determine that if Netflix acquired three million subscribers, it would make decent money.

Quick Triple

In fact, the next year Netflix started to show a profit, and the stock shot up to $60. Well satisfied with a three-bagger (as Peter Lynch, the legendary former manager of Fidelity Magellan Fund, calls a tripling in share price), I sold all my stock. Shortly afterward, Netflix split two for one, and for the next five years I repeatedly patted myself on the back as worries about competitors and pricing pressure kept the shares from breaking out.

Then, in 2009, Netflix made some major breakthroughs. Customers began to forgo the mail for the joys of being able to download movies from Netflix via the Internet. Netflix even struck deals with Microsoft, Nintendo and Sony that brought videos directly to game consoles. Shares of Netflix, which now has more than 13 million subscribers, closed at $118 (the equivalent of $236 before the split) on August 6. (more)