Heading Into Internet Sector Earnings: Buy Yahoo, Hold eBay, Sell Google?

Earnings season kicks into high gear this week, and perhaps no other sector will be in the spotlight more than the Internet sector, as Yahoo! (YHOO), eBay (EBAY), and Google (GOOG) all report earnings this week. YHOO and EBAY represent more than 55 percent of the Internet HOLDRs Trust (HHH), so they will weigh heavily on the ETF this week. GOOG isn’t a component of HHH, but it has influenced the entire sector with its earnings reports since going public in 2004.

The sentiment picture is mixed toward these three stocks. GOOG is seeing excessive optimism, with a short interest ratio below one and every single covering analyst rating it a “buy.” EBAY also has some optimism directed its way, but not to the degree that GOOG does. YHOO actually has a certain amount of pessimism, with more analysts rating the stock a “hold” than a “buy.”

None of the three stocks has a very high short interest ratio, so the possibility of a short covering rally is very small. All three get an “A” rating on our fundamental ranking, so they seem to be even in that regard.

Looking at the charts of these three stocks, the technical factors align fairly well with the sentiment. YHOO looks the best from a technical standpoint; it is not overbought and has been trending higher over the past six months. Given that the sentiment is somewhat bearish and the technicals look good, YHOO looks like the best bullish candidate of the three.

EBAY sits in the middle of the three in terms of sentiment, and such is the case for technical factors. The stock has moved higher over the last few months, but it seems to be running into resistance at the 34 level. This area acted as resistance in November and again in February. Until EBAY is able to break above this resistance, it looks like a hold in my book.

GOOG is the most loved stock in the U.S. markets, based on the number of analysts covering it and the fact that all rank it a “buy.” This doesn’t leave much room for upgrades. Add to the over-the-top bullish sentiment the fact that the stock has been trending lower over the past four months, and I would consider GOOG a sell heading into its earnings report.

So there you have it. Three different stocks in the Internet sector and yet all have different outlooks. Using fundamental analysis alone, the three appear to be fairly equal, but when you combine the fundamentals with technical analysis and sentiment analysis, one looks like a buy, one looks like a hold, and one looks like a sell. The earnings releases this week will tell us whether or not we were right.