AOL: The Internet Momentum Play

May.28.12 | About: AOL Inc. (AOL)

Shares of the once online industry leader AOL Inc (NYSE:AOL) have nearly doubled over the past six months. This move compares to the lackluster performance of other internet companies such as Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), Amazon (NASDAQ:AMZN), and Facebook (NASDAQ:FB).

As you can see in the chart below, shares of AOL have rallied while GOOG, AMZN, and YHOO have done nothing. While shares of FB are not shown in the chart below, the stock has been a disappointment to almost everyone.

Reason For The Rally

While AOL has reported some better than expected quarters, the primary reason for the rally was AOL's decision to sell over 800 patents to Microsoft (NASDAQ:MSFT) for $1.1 billion in early April. However, AOL shares have continued to move higher in the time since the deal was announced.

Short Interest

Despite the rally, many on Wall Street are still skeptical about the company's future. Short interest in AOL currently stands at 11.51 million shares or 15.1%. As the stock continues to gain momentum, shorts will likely feel pressure to cover. Additionally, if any positive news comes out on AOL, the high short interest can lead to a short squeeze.


From noted market commentator Dennis Gartman's 22 rules of trading:

The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.

Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

Investors who are looking to ride the momentum in interest stocks should consider AOL instead of other names such as GOOG, AMZN, FB, or YHOO.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.