Amazon/eBay, Yahoo/Google: Internet Trading Pairs With Good Potential

Google (GOOG), Yahoo! (YHOO), eBay (EBAY), Amazon (AMZN) and Baidu (BIDU) (China) are the leading publicly traded internet companies whose primary business is online and whose face is directly visible and known to the public. There are other important internet companies, but they are more behind the scenes.

We prefer EBAY over AMZN and GOOG over YHOO.

For those more adventuresome people who seek long / short trading pairs as part of their “alternative investment” or “hedge” allocation" (as opposed to investing in a long / short fund), we think a long EBAY / short AMZN pair, and a long GOOG / short YHOO pair has good potential

These are trades, not investments.

We are not predicting that the shorts will go down, but that they will rise less than the longs, and perhaps go down. Trading pairs can be used to capture divergence in investor sentiment and valuation for the two parts of the pair; and to a certain degree insulate the trade from overall market direction.

Pair trading is no doubt a directional bet approach, but one based more tightly on the two stocks involved and less on overall market action.

EBAY / AMZN
We think EBAY has a better business mix for the future than AMZN. EBAY has auctions, credit card processing and voice over internet. AMZN has principally retail books, videos & groceries; and video on demand. AMZN may have a lock on retail books and videos, but has no advantage over major grocers in the long run and video on demand will likely be dominated by other players,

The table below presents a picture of a healthier and more realistically valued company in EBAY than AMZN.

GOOG / YHOO
We think GOOG is well managed and that YHOO is poorly managed. This comes from direct experience with both in the “pay for clicks” arena, where GOOG was easy to use and YHOO was so frustrating and bureaucratic that we gave up and knew then that GOOG would eat their lunch. Nonetheless, we prefer Yahoo Finance to Google for stock information. This pair may be a higher risk than the EBAY/AMZN pair, because it relies more on extraordinary growth on the part of the long than the EBAY/AMZN pair.

The table below presents a picture of a healthier and more realistically valued company in GOOG than YHOO.

Full Disclosure: On 04/19/07 when this article was written, author was long EBAY, short AMZN, long GOOG and short YHOO.

Comments

[rjp:]

I thought you were nuts when you +EBAY/-AMZN'ed and forwarded it to a co-worker who knew I loved
the other side of your spread. How's it doing today? I still believe in +YHOO/-GOOG too. Want the other
side?

2007 Apr 25 11:09 AM

[QVM Group:]

It was just a trade. I was in and out is a couple of days. I made a bit -- not too much. As I said in the article, it was a trade, not an investment. Not sure how it is doing now, because I never look back once I close a position. Thanks for writing though. Probably, I will not write about trades in the future and will instead focus on issues that have a longer shelf life.

2007 Apr 25 03:33 PM