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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Searching for Reasons to be a Contrarian |
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Part of finding undervalued stocks is being willing to go against the crowd and buy something that has been beaten down. This doesn’t just go for long-term investments; even for short-term trades the best strategy, statistically speaking, is to buy weakness and sell strength. This methodology does not, however, lend itself to blindly searching the 52-week low list for “good” stocks nor does it imply the 52-week high list is overpriced; a qualitative assessment is necessary as well. Nowhere is this more exemplified today than in Internet Search, with the diverging fortunes of Google (GOOG) and Yahoo (YHOO). I am far from bullish on GOOG, as I think the stock offers no margin of safety to investors. Compared to YHOO, however, GOOG looks like a gem. While I take issue with some of the accounting and valuation techniques used to price GOOG, I can’t argue with the fact that the company is growing incredibly fast and offers the best internet search platform available. Yahoo seems to be stuck in a rut of incompetence, and I can’t believe that CEO Terry Semel still has a job. Normally, getting your lunch eaten by your competitors over a span of several years doesn’t end positively for the man in charge, but for some reason Yahoo has been resistant to change… which is probably why Google is the market leader today, and Yahoo is basically a relic of the dot-com years. Granted, I love Yahoo Finance and use it all the time - but there is a huge gap between having an audience and making money. If I owned YHOO, I would be very, very afraid that the company won’t figure out how to get itself righted until too late. Technology is interesting in that once it is widely adopted, it confers a certain exclusivity of market share because people get comfortable with the product. Microsoft (MSFT) managed to pull this off with Operating Systems (OS), and it leveraged that dominance through thick, thin, and Department of Justice anti-trust lawsuits into a $300 billion company. Only after close to two decades of dominance has open source competition begun to emerge, with the primary selling point being that the product is free. Let me draw some parallels: As I’ve said, I don’t like GOOG. I think it is simply priced too expensively - near 100x FCF. Google continues to increase head count at a very high rate, stock-based compensation takes a big chunk out of earnings, and capital expenditures continue to sizably impact cash flows. Still, having to pick one, GOOG looks better than YHOO. All Yahoo has shown is a lack of innovation and an inability to execute and deliver on the bottom line. With the market reaction following earnings, the normal inclination would be to short GOOG or go long YHOO and look to fade the gap; but the gapdown in YHOO doesn’t look like it will be retraced anytime soon. Why? On metrics involving value, GOOG looks slightly more expensive than YHOO. You might anticipate such a development, but factoring in growth actually makes GOOG look cheap. The quantitative and qualitative differences are so vast between Google and Yahoo that anyone owning YHOO right now should probably hire a new financial advisor. To play earnings in Internet Search, short YHOO; I believe GOOG is still too expensive on an absolute basis to be comfortable owning the shares, but if developments occur that make GOOG pullback toward $400, I don’t think it would be a bad idea to add a leg and set up a paired trade to be long GOOG and short YHOO. If you read this and have a position in YHOO or GOOG, I would like to hear from you on your reasoning for owning either one. My email is research@valuestockreports.com - thanks! |