Flattened market values mean big institutions move out of these stocks and into more traditional fare. That s why the Net sector stands so deflated. And considering the rate at which Net companies burn cash, even some of those companies that are sitting on heaps of cash today will be broke tomorrow. That said, for bargain hunters, cash is a great place to start. The next step involves determining the rate of cash consumption, the presence of offbalance-sheet liabilities, the quality of management and the workability of the business plan.
Some investors prefer to take a more active role in realizing a company s balance-sheet value.
Robert Chapman, of El Segundo, California-based Chapman Capital, has spent years investing in distressed situations. By the time you get to it, management has sucked it dry. Preview Systems is just the worst example I ve seen so far. Chapman warns further that corporate governance in the busted Net arena is often an illusion. Many of these companies are still effectively startups and are now staffed and backed by their venture capitalists.