Internet HOLDRS (HHH)

Internet HOLDRS Trust invests in various segments of the Internet industry. It has net assets worth approximately $364 million trading at a price to earnings multiple hovering around 35.

Yahoo, EBay and Time Warner the top three holding account for more than 70% of the fund allocation thereby offering less diversification. There is nothing much to expect from Yahoo which accounts for 30% of the funds corpus as the new Project Panama would give monetary benefit only after the second half of 2007. Moreover uncertainties surround its advertising platform that has resulted in Yahoo’s management being very conservative in its revenue guidance projection for 2007 to avoid further disappointments. Timer Warner is loosing its financial muscle being loaded with debt and looking for further acquisitions. Though it had done a good job with its capital allocation and share buyback program it has failed to capitalize on the synergies that would arise out of the acquisition already done.

TD Ameritrade and E Trade Financial are the two discount brokerages that would benefit from the higher capital market activities with volatility. Online retail companies like Amazon and EBay face huge competition in providing value and convenience apart from facing problem with free shipping cost, which are rising due to hike in energy prices. Though the business model of Amazon.com looks solid its margins have taken a beating due to aggressively marketing spend to enter new product categories and attract new customers by selling at rock bottom prices.

Other Internet related software companies like Real Networks, CNET, McAfee, Earth link might benefit from the projected increase in online advertising spends in 2007 but is facing stiff competition amongst their peers. There has been no consistency in the performance of the fund despite average annualized return for the past five years looking good at 14.4%. However it posted negative returns of 5.4% in the last year and chances of beating the market in 2007 looks dim.