Tuesday, July 15, 2014

Short Trading Idea: Yahoo (YHOO) Reminiscent of 3COM (COMS)

Yahoo (YHOO), once the search engine leader and internet king, has fallen behind the likes of Google (GOOG), Facebook (FB), Twitter (TWTR), and many more in the new era of Internet 2.0. A new CEO and rumors of an eventual Ali Baba (BABA) IPO, of which Yahoo owns 24%, helped the stock advance just over 250% after breaking out of a cup and handle base the week of October 26, 2012 to its high on January 8, 2014.

The hype surrounding Marissa Mayer's ability to turn the company around has not come to fruition as of yet, if it ever does. Earnings have grown approximately 17% and sales have been negative during the advance. Analyst don't expect much out of the company over the next three years either. Earnings are expected to slow down to 8% and sales will show no growth at all. Not exactly growth type performance that warrants a stock trading at almost thirty times earnings, crediting most of the move more to Ali Baba's IPO then anything the company has actually done.

3COM (COMS) was in a similar situation when it announced the spin off of Palm (PALM), the hottest handheld device before Apple's (AAPL) Ipod and Iphone, in 2000. The company, once the king of modems, ran up over 2,300% from 1992 to 1996, but languished for the remainder of the bull market until announcing the Palm spin off. The stock then ran up up just over 350% in under five months until it topped on the Palm IPO, eventually being taken over by Hewlett Packard (HP) in 2009 well off its all time highs.

Yahoo is now in the process of forming a head and shoulder top with earning expected today after the closing bell. If the company does not start to show signs of turning sales and earning's growth around soon, the Ali Baba boost will not last long past the IPO. Based on current projections, the stock could fall back to near pre-breakout levels around $15 over the next 12 - 18 months and even lower if the market enters a sever bear market over the next few years.

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