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Angie’s List and Yelp Are 5-Star Buys

On Monday, Northland Capital put out a bearish target on online ratings stock Yelp (YELP), rating it “market perform” with a price target of $35. That’s up from the previous target of $27 per share but still down from current pricing by about 10%.

UBS also cut its YELP stock rating to “neutral” today with a target of $40 — about breakeven with current prices, and down from a previous target of $42.

But despite recent negativity, investors shouldn’t give up on this pick or any other online review stock out there. After big-time profits there is a lot to be excited about at Yelp, Angie’s List (ANGI) and others — and longer-term, it’s increasingly clear that online reviews are going to be the way the web works down the road.

Popular online review site Yelp priced its offering at $15 a share in early 2012. It’s now trading close to $40. The reasons are obvious: In this Internet age, people care a lot about what other people have to say — it’s the power of the wisdom of crowds and all that, and the idea that publicly ranting or raving about your experience is not just an exercise in vanity but an exercise in democracy.

Perhaps you’ve seen signs on the door of your favorite restaurant about Yelp reviews. For better or worse, these are a powerful way for consumers to check the quality of a business. The site has more than 15 million users, and is looking to expand its brand abroad instead of just focusing on U.S. businesses.

There’s clearly power here — and not just because Yelp’s stock has soared or because revenues are up five-fold since 2009. The biggest tell is how others are rushing into the space, too.

Angie’s List, a subscription-based service to help rate service providers from roofers to dentists to car repairmen, went public in November 2011, priced at just $13 per share. Things were rocky for a while, but ANGI has doubled so far in 2013 to trade near $25.

It seems like review sites are getting rave reviews, at least on Wall Street.

It’s not just the dedicated customer review sites that are looking up, either. OpenTable (OPEN), the online restaurant reservation service that offers dining reviews as well, went public at $20 in spring 2009 — and while the timing at the bear market lows was not so hot, the stock now trades for more than three times that price, around $68 per share. And travel information, reservation and review site TripAdvisor (TRIP) started trading at $27.50 in December 2011 when it was spun off of Expedia (EXPE), but now the stock trades for $63 per share.

And let’s not forget about Google (GOOG) and its 2011 purchase of Zagat in an effort to build out its “Places” segment, which integrates reviews and business directories with its Google+ and Google Maps offerings.

Increasingly, this is how folks use the Internet. Whether it’s looking up the rating of a new dishwasher or reading about your neighbors’ experience at a new bar, people are looking at what the Internet has to say about businesses before they open their wallets.

In the longer-term, that means stocks like Yelp and Angie’s List are big buys — presuming Google or someone else doesn’t disrupt their model, of course.

Watch YELP earnings closely on July 29 for growth — and, of course, profitability, which has so far been elusive. Angie’s List earnings reports July 24.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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