Time to Buy Internet Stocks: Citi

Battered and bruised large-cap Internet stocks are worth a flier at current levels as their recent selloffs have been accompanied by little or no change to to actual fundamentals, according to Citigroup(C) analyst Mark May.

Many tech stocks fell out of favor in the blink of an eye following sharp rallies that pushed their valuations to sky-high levels. With many of these stocks down 20% or more from recent peaks, some analysts, including Mr. May, say they are starting to look attractive again at current levels.

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“We believe the recent pullback represents a particular opportunity among large cap Internet stocks, with multiples having retraced to levels not seen for more than two years, with no/little change in fundamentals, and with investment profiles that sync well with what portfolio managers are seeking in today's market,” Mr. May wrote to clients.

His top picks include Facebook Inc.(FB), Google Inc. and Amazon.com Inc.(AMZN) He also noted AOL Inc.(AOL) looks “particularly oversold” at current levels. Facebook dropped 23% from early March through late April, Google fell 15% over a two-month time frame, and Amazon lost 28% since peaking above $400 in January. AOL dropped 21% in a day last week after its quarterly report fell short of analysts’ expectations.

Citi’s market-weighted large-cap Internet index is down 18% since peaking in early March, according to Mr. May. The S&P 500, by comparison, has edged higher over the same time frame and on Tuesday crossed above 1900 for the first time.

As the chart below shows, the Citi Internet index’s drop is the biggest in its two-year history.

“Despite the pullback in valuations, the fundamentals of large cap Internet companies haven't changed,” Mr. May says.

To be sure, many of these companies may be cheaper than they were a few months ago, but they’re still not cheap by traditional valuation metrics. For instance LinkedIn Corp.(LNKD) trades at a forward price-to-earnings ratio of 74. While that’s down from 118 in early March, it’s still significantly pricier than the S&P 500′s P/E ratio of 15.2, according

But that isn’t stopping Mr. May from recommending them to clients.

“We believe this pullback not only creates an opportunity but has positioned large cap Internet stocks well relative to the key factors many portfolio managers are seeking in today's market.”