I’ve said this a few times in the past but I’ll say it again, the goal of these stock picks is to make money, not try to come up with original ideas. Therefore, many of you will remember that about 6 weeks ago, I had opened the same exact trade, going Long Apple (NASDAQ:AAPL) and Short Yahoo (NASDAQ:YHOO). Of course, that trade ended up doing very well, we closed it with a 24.93% return! This weekend, while looking for new trade opportunities, Apple once again stuck out as cheap and one of the stocks that is commanding a similar valuation (in regards to next year earnings) is Yahoo, surprisingly. Eventually this trade will go wrong but if I end up having been right 10 times shorting Yahoo before that happens, it will still have been an incredibly good call.
Before going further, let’s take a look at the numbers that we used this time around:
|Ticker||Name||Price||EPS||PE Ratio||PE Next Year||Return YTD||Sales Growth||Analyst rating||Book Value||Beta|
No doubt, it continues to stun me that Apple trades at such a low P/E. The most recent rumors of new products in the Iphone/Ipad/Ipod lines now assume an October launch which would still be more than enough to enjoy the benefits of the Christmas Holiday sales. Will Apple be able to keep 50-60% growth rates? No way. That being said, growth will continue to be strong and there is no way that it should trade at a similar P/E as a company such as Yahoo that does not have any major growth left in its U.S. operations.
Yahoo is probably the one company that I have picked on the most. The company has been able to come to an agreement with Alibaba regarding Alipay from what we understand but that agreement does not look like it’s very favorable to Yahoo which continues to struggle having any power over its Asian assets which are the only ones that are seeing significant growth in the company. There are certainly risks to being short a company like Yahoo but at this point I’m confident that even when it happens, the benefits from shorting Yahoo all of these times will be so much larger than whatever loss will occur that I will be very comfortable if it does happen. As discussed the last time, here are the main risks that we see to shorting Yahoo:
- If CEO Carol Bartz is replaced, the stock could jump.
- Yahoo selling off some of its Chinese assets could monetize Yahoo’s value.
- The always existing risk that Yahoo could be acquired at some point.
- Yahoo has a lot of cash and assets and almost no “value” assessed to everything else. If Yahoo could just manage to get on the right track, its stock could rise again.
The Basic Idea of This Trade
It is the 2nd time in a few weeks that I initiate this trade and in my opinion, little can go wrong except for those “rare” events discussed above. I wouldn’t be able to come up with one single person that sees more things going right for Yahoo than Apple at this point and even if things did take a slightly different tendency, this trade would work fine in the medium to long term. Basically, the momentum is so one sided on both of these companies (and their stock prices) that a little time should be more than enough to close out this trade successfully.
Disclosure: No positions on Apple or Yahoo.