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December 16, 2005

Yahoo: New Buy For Client Accounts

With cash building in client accounts as winning trades were being harvested, I have been looking for a new idea to add to portfolios. I've picked up the hunt for a new idea because I believe the recent resting period for the broader market averages will give way to one more move upwards in 2005. Consequently, I was looking for an idea that would enjoy near-term momentum as the possibility exists that the stock would be sold if it reached initial targets quickly. I finally settled on Yahoo (YHOO) and shares were purchased across most client accounts earlier this week.

The purchase of YHOO was motivated by several facts....

First, cash positions in many accounts were higher than I wanted. Second, I remain bullish for the short-term and still think the S&P 500 can add another 2-3% to this year's gains within the next several weeks. Third, YHOO has a good chart after consolidating its recent up move. Fourth, technology in general, and the internet in particular, are in their seasonally strongest period of the year. The bottom line is I went long YHOO because I am bullish and willing to play what I think will be renewed momentum in the stock over the next few weeks as the market makes another move higher.

Regarding seasonality, I read in Advertising Age that, according to Nielsen/NetRatings, visits to online retailers were up over 35% vs. last year for the week of December 4th. YHOO is not a retailer but this datapoint gives a sense of how internet traffic picks up in the holiday season. YHOO can monetize some of this traffic, at least that which makes its way to any Yahoo! site. Further, some of YHOO's regular users are likely to increase their searches at this time of year. So even if YHOO loses further search share to Google (GOOG), a rising tide lifts all boats. Since my interest in YHOO is significantly motivated by a short-term trade, I think the favorable seasonality leaves the shares in good shape from a sentiment perspective.

YHOO is an expensive stock trading at 23 times 2006 estimated EBITDA and over 50 times estimated 2006 EPS before stock option expense. However, in terms of growth, you get what you pay for. Current analyst estimates for 2006 call for revenue growth of 29% and EBITDA and EPS growth (ex-stock options) of over 30%. Furthermore, looking out to 2007, which is projected to grow north of 20%, sustaining the forward EBITDA multiple while making no changes to the cash balance or the value of Yahoo Japan, brings you to a $45 target. As a growth stock, YHOO has tended to trade on year ahead financial results.

So, my hope on this trade is for $45. The chart could take it there assuming the current consolidation results in a breakout to new highs. Given my desire to bring down cash and position for a bullish move in the market, buying YHOO at $40.40 provided 10% upside, sufficient to fulfill my strategy for this trade. Since YHOO was purchased with a short-term target in mind, I plan to keep it on a short leash in the event my outlook for YHOO or the market is incorrect.

Posted by Steve Birenberg at December 16, 2005 09:14 AM in YHOO