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Strong Buy on Yahoo (YHOO.NASDAQ)


I've been looking at some of the adjectives and sobriquets our local analysts have bestowed on Yahoo Inc (YHOO.NASDAQ) of late..
' of the worst run big companies..'
'...a mediocre hybrid...',
and my personal favorite,
'...rudderless Internet hodgepodge...' (thank you Rob Cox of Thompson Reuter.

So just what is Yahoo, except a so called media company with ads? Nothing, really. Has it struggled, unsuccessfully, to create a vision of what web surfers should see beyond the browser? Perhaps. But not very hard. It seems to me the company has rested on its laurels for a long, long time.

Of course recent events have shown the rest of us how to hire, and more importantly, how not to fire, a CEO. What a mess that was!  The name calling, the bad language, the publicity!  The Dale Carnegie Course on How to Win Friends and Influence people should be mandatory in Silicon Valley. Tech is just loaded with folks with poor social skills.

The company itself is nothing more than the sum of its parts, and I suppose that's why I for one have always avoided it.  It has never given me a cohesive, front-to-back customer experience.

In fact I remember asking years ago what Yahoo actually did, and more importantly, how they made money. 'Ads', was the answer, 'tons and tons of them'. Ten years later the answer is still the same.

It is common for big companies that fail to progress or grow yet remain profitable to eventually fall into stronger hands, or break up. When Google came along I thought Yahoo would merely wither on the vine, and I think any prospective suitor has probably had an innate fear of Yahoo's revenue simply falling off a cliff someday.  So far it hasn't: In 2010 it had net income of $1.2 billion on revenues of $6.3 billion. Nor is that likely to diminish, since much of what Yahoo calls marketing revenues, essentially Internet advertising, comes by way of the newspaper channels, which have stagnated in recent years. There is no reason to believe the inverse growth ratio of print to Internet is likely to change unless and until the dailies get religion on the new media and wise up.

But something ain't right with Yahoo.

In July they guided their earnings below analyst forecasts, prompting First Call to drop their estimates for the quarter by 41% (-16.9% for the year), versus a 13% increase for the sector. Then there's that paltry ROE of 9.8% over the last 12 months against the industry average of 34.28%. Not good. Of the 26 analysts rating Yahoo stock, more than half recommend a hold.

What is disturbing is that Yahoo's cost of doing business year -over- year is reportedly growing faster than the revenues, and that stems no doubt from the cost of competing in those lucrative foreign markets, making expensive - and questionable - acquisitions.

All that has to change, and I suspect the board has to get its head around change in general. Develop new products and grow, and find the right person or people to stickhandle it, or stay the same and continue to lose ground.

The good news for investors is the YHOO chart -- which suggests a probable short term price gain of a couple of bucks, to $16 1/2 or $17 1/2 per share. Whether the stock will grow legs beyond that depends on whether more than one big competitor decides Yahoo is worth fighting over.

More on that in subsequent editions.

Careful out there.


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YHOO over the next 72 hours.