Doubling Down on Yahoo Stock: Double Smart, or Double Dumb?

| About: Yahoo! Inc. (YHOO)

Capital World Investors disclosed Thursday that it now holds more than 10 percent of Yahoo (NASDAQ:YHOO) shares, or 135,542,600 shares, up from 69,647,000 on Dec. 31.

Roughly speaking Capital World Investors doubled down, according to a filing with the Securities and Exchange Commission.’s Dawn Kawamoto speculates that perhaps Capital World had an inkling about Microsoft’s (NASDAQ:MSFT) bid. Perhaps, but Capital World Investors had a relatively brief window to build up its position to make a killing.

In January, Yahoo shares were roughly hovering at about $20 with a few spikes above $23 and a few below $19. After that Yahoo spiked to roughly current levels.

Capital World Investors doesn’t have to disclose its average cost per share, but a price in the mid- to high-$20s is likely. Consider:

  • From Sept. 30 to Dec. 31, 2007 Yahoo shares had an intraday high of 34.08 and a low of 22.80. Most days were in the 25 to 27 range and Yahoo shares only broke the $30 mark for a few days before falling back.
  • From Dec. 31 to Mar. 31 Yahoo shares had an intraday low of $18.58 and a high of $29.75. If the investment firm invested in Yahoo in January it is sitting pretty on its holdings. If the firm doubled down following the Microsoft bid its cost basis would like still remain in the mid- to high-$20s.

But the bigger picture is this: Capital World Investors is pretty damn sure that Yahoo will get taken out for at least $31 a share. With that perspective Yahoo shares are easy money. All Capital World Investors needs is $1 more than its average cost basis and it pockets more than $135 million. It’s safe to assume that Capital World Investors has a lower cost basis than $30.

So what can nuke Capital World Investors’ seemingly infallible plan? Microsoft could walk. If Microsoft walks, Yahoo shares could quickly head underwater for Capital World Investors. What about AOL? No one is going to get excited about an AOL-Yahoo deal. Let’s just say the braintrust at Capital World Investors will be watching Microsoft CEO Steve Ballmer very closely. Millions of dollars will ride on what Microsoft chooses to do with its Yahoo bid. Doubling down looks brilliant today. It could be doubling dumb tomorrow.