Yahoo has room to grow

When the Internet company spends, it's time for you to buy.

By TheStreet Staff May 29, 2013 11:41AM

thestreet logoCredit: © Robert Galbraith/ReutersCaption: Yahoo logo is shown at the company's headquarters in Sunnyvale, CaliforniaBy Robert Weinstein

 

We all know the story. Yahoo (YHOO) was the king of the Internet and unstoppable. The only problem was that Yahoo believed it, too. Finally, we have hope again for Yahoo to reach its full potential.

 

After its countless embarrassingly freshman mistakes in online retail, eBay (EBAY) and Amazon.com (AMZN) knocked out Yahoo shortly after the opening round.

 

Google (GOOG) dethroned Yahoo search so incredibly expeditiously that Neutrinos could be overheard saying, "Wow, that was fast!" To add insult to injury, Google used technology to make buying and selling ad space easy for everyone.

 

As a result, money poured into Google's bank account so fast that it can legitimately be compared to holding a funnel under Niagara Falls to collect water. As foreign as it may seem to many companies, if you simplify your site and empower your users to achieve their goals more easily than your competition does, you increase your chances for success.

 

Not all of Yahoo's assets have capsized in the wake of superior competitors. Yahoo Finance dominates the sector to the point of receiving nearly one of every two financial news searches. If you can select only one place to have leadership, investment news is it. The reason is simple: Finance-related content drives the highest-paying ads within the family-friendly net.

 

Yahoo has too many assets to name one by one, but taken together, the whole is greater than the sum of its parts. For this reason, I applaud the recent purchases and where Yahoo's Chief Marissa Mayer is leading the online company.

 

Mayer has made her share of news since taking the helm, but the headlines that shareholders care about most begin with "Yahoo making another 52-week high." They've given her a resounding A+, based on shares increasing from a range of between $15 and $16 at the start of her tenure to over $26 currently.

 

There is little reason to believe Mayer doesn't fully understand the expected ROI (return-on-investment) from Tumblr and other recent purchases. The market isn't totally sold yet, but the price decline is your chance to pick up shares at a discount.

 

Buying dips are exactly the reason why I warn investors not to chase stocks higher or to get emotional. The natural wave-like price movement should be used to your advantage and Yahoo is setting up for another buying opportunity.

yahoo chart

You can gain a greater understanding by looking at the price chart, observing the new highs followed by a retracement, and again followed by a new high. Stocks in an accumulation phase never go straight up and can remain in the current pattern for years.

 

Watch for an entrance near $24.50 or lower as a starting point to add to or initiate a position. You can also use options to reduce your risk through hedging. If Yahoo reaches our entry level, look to sell a July $24 strike put for about $1. Your overall risk is 5% lower and if Yahoo shares continue to decline without a bounce, your cost basis will only be $23 instead of $24.50.

 

If Yahoo continues to climb, you limit your profit to only about $1 a share, but that's hardly anything to feel regretful about, considering your 4% gain in about six weeks.

 

At the time of publication the author had no position in any of the stocks mentioned.

 

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