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Is Yhoo Good Value?

Monday has been a busy day for day traders and arbitrageurs interested in Yahoo. 4 hours into trading, Yahoo’s stock is down about 14%, much less than the wisdom of the crowd predicted. The day is not over, maybe a big drop will occur at the end of the day. After that the stock will be back with investors rather than traders. But is it worth investing in?

I am not a trader, don’t have the stomach for it. So I have no idea what Mr. Market will do, but occasionally I dabble in undervalued tech stocks where I think I may know more than the crowd. Usually the smaller ones where fewer analysts are poking around. (Wonderful opportunities around 2002, few since then, but looking good again now). My starting point is PEG (Price Earnings Growth) ratio. I like to find stocks below 1 and then make my own judgment on next 5 years earnings. On PEG, Yahoo looks overvalued compared to the other Gorillas (from Yahoo Finance Statistics):

Yahoo = 2.92

Microsoft = 1.21

Google = 1.02

Amazon = 2.27

eBay = 1.02

Falling price does not equal value. Three types of investor are holding Yahoo stock high for different reasons:

  1. Arbitrageurs who believe that a deal will still be done, even if it is not Microsoft who does it. They may have a point. It is a gamble, but that is what these guys do. They probably figure some safety based on the fact that, if no deal is done, then:
  2. Yahoo will outsource search to Google, giving a quick earnings “pop” at the expense (maybe) of long term competitive advantage. So traders can get out after the pop, leaving longer term investors hoping for:
  3. Yahoo pulling out some serious magic. The one belief that may have some grounding in reality is that Yahoo has the best grasp, among the big guys, of how to monetize social media in a way that does not destroy social media for the users. Yahoo would be a great stock to own if they pulled that off. But that is pretty tough to pull off.

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