(By Balaseshan) Deutsche Bank analyst Ross Sandler is of the view that small and mid cap Internet is an attractive space to allocate funds.
Sandler largely expects solid results out of small and mid cap internets in 4Q, as fundamentals remain strong for most. He doesn't find a lot of commonality in terms of trade-able themes, but the one worth exploring is that the most controversial names are likely where the most alpha is going to be generated in 4Q.
The analyst's best actionable long ideas (some of which are extremely out of favor right now) are Groupon Inc. (NASDAQ: GRPN) and IAC/InterActiveCorp (NASDAQ: IACI). He also thinks Blue Nile Inc. (NASDAQ: NILE) and AOL Inc. (NYSE: AOL) are going to have upside.
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Sandler doesn't ascribe to history being a good predictor of future performance for Internet, but there is some correlation as investor sentiment tends to be seasonally similar each year.
Over the past three years, online advertising names have outperformed e-commerce and online travel in terms of T+1 day return on the 4Q print, and generally 4Q is not the best quarter to be long, the analyst noted.
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Sandler said large caps have bucked this trend, with eBay Inc. (NASDAQ: EBAY), Google Inc. (NASDAQ: GOOG) and Amazon.com Inc. (NASDAQ: AMZN) all outperforming on their results, while Facebook Inc. (NASDAQ: FB) was muted.
The analyst continues to have a value-bias to his recommendations, but the biggest driver of historical performance is direction of upward estimate revisions.
The ideal situation for alphas generation on the long side is a value multiple and upward estimate revisions, especially for a name that has gone out of favor, Sandler noted. Those opportunities exist at GRPN and IACI, to a lesser degree AOL. Higher multiple names that he sees upward estimate revisions include NILE.
The analyst generally has a positive bias on most names in the Internet space, however, he thinks upside is limited near term for Mercadolibre Inc. (NASDAQ: MELI) and Yandex NV (NASDAQ: YNDX).
In MELI's case, consensus estimates appear lofty and the company faces tough comps, Sandler noted. For YNDX, he expects solid 4Q but likely conservative initial guidance for 2013 despite solid underlying trends in the business.