Internet Tech Stocks That Think It's Still 1999

By Aryeh Katz | May 31, 2010 AAA

In the heat of the Nasdaq dotcom bubble of the late 1990s, some tech stocks were doubling in value every six to 12 months. We know with hindsight how it all ended, with the Nasdaq proxy PowerShares QQQ Trust (Nasdaq: QQQQ) losing close to 80% of its value and still failing to recoup those losses a full decade later.

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Fast forward to the present, and a somewhat similar type of story is unfolding: three Nasdaq issues are heading higher with a vengeance - only this time it's against the general tide of the market.

Net Security That Keeps Climbing

CyberSource Corp. (Nasdaq: CYBS) is occupied with two separate businesses: online payment and risk management services. CyberSource stock is up over 50% in the last three months and 95% on the year. Compared to the Internet HOLDRs ETF (NYSE: HHH), CYBS shares are a standout. HHH gained only 34% in the last 12 months, and for the last three it is practically even.

Just over a month ago, credit giant Visa (NYSE: V) purchased CyberSource for $2 billion in cash, spurring a rash of lawsuits against the company's board for possible breach of fiduciary duty. Some shareholders claimed the company's board of directors was negligent in its representation of shareholder interests. Specifically, the lawsuits claim that foreign sales were not included in pricing the company's shares, hence undervaluing them by a large margin.

CyberSource has grown sales at an exceedingly healthy 48.5% rate for the last five years, outpacing the industry by wide margins.

The Case For The Defense

Stanley (NYSE: SXE) provides IT services to the U.S. military and a number of federal civilian government agencies. Nearly three-quarters of its revenues are derived from contracts with the Department of Defense. In less than three weeks, Stanley shares have tacked on better than 18% in market cap following a tender offer from CGI Group (NYSE: GIB) to purchase the company's outstanding shares for $37.50 a share.

As with CyberSource, this merger agreement has Stanley shareholders running to the courts for remedy. They claim that Stanley's board of directors did not properly shop the deal to maximize shareholder value. Indeed, the board agreed not to solicit competing offers lest the deal break down and Stanley be liable to CGI for a breakup fee.

The Wrap

Of all the inexplicable Wall Street tales: two tech stocks move against the tide in a down market and face internal, shareholder-based lawsuits because of it. Shouldn't these investors be counting their lucky stars? Shouldn't they just take their cash and plow it into stocks that have been beaten down of late? Hmm... (This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions. To learn more, read Trade Takeover Stocks With Merger Arbitrage.)

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