New Stock Pick: Long Apple (AAPL) & Short Yahoo (YHOO)

avatar By: IS
Date posted: 06.27.2011 (5:00 am) | Write a Comment  (0 Comments)

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After being able to close out 2 trades last week, I can open a new one today which is great news, especially after I decided to no longer open trades after October…time flies by and I’m hoping to get a few more in. Most of you will not be surprised to see that we are opening this trade. Over the years, we have consistently been long Apple (AAPL) and short Yahoo (YHOO). It’s always a bit worrying to go long a stock (Apple) that everyone loves but the numbers are the numbers right? Before getting started, let’s look at the numbers for both of these companies… as you will notice, both stocks are going through difficult times, they both have the same terrible trend analysis score.:

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Long Apple (AAPL)

I don’t think anyone thinks that Apple’s growth can keep up and I’m not a believer of that either. That being said, there will still be growth which makes its current P/E ratio look cheap. Seeing Apple currently trading at a smaller P/E ratio than Yahoo is very odd. Of course, while Yahoo has a few possible events that have upside potential, the opposite is true for Yahoo. The stock continues to struggle as investors worry about the state of CEO Steve Jobs’ health. Can he return to the company that he turned around? Apple is the most admired company in the world and has been successful in each of its last launches, the last one being the incredible domination of the tablet market thanks to the iPad. Can Apple continue to come up with these products year after year? I am hoping this trade can lag a bit and hopefully see the Iphone5 being released in a few months. That will certainly remind everyone that there remains a lot of growth.

Short Yahoo (YHOO)

Yahoo is probably the one company that I have picked on the most. Its CEO, Carol Bartz has helped Yahoo keep its decline going and despite growing calls for leadership change, the board has not acted yet. Yahoo, one of those internet content companies that I’ve enjoyed hating. Yahoo fits in so well because it tries to be great at so many different things and ends up being just average which is simply not good enough. Most of Yahoo’s value at this point comes from its ownership of Chinese assets that have tremendous value (because Yahoo is not managing them???). Even in those, Yahoo is screwing up. There are 4 possible problems with going short on Yahoo at this point:

1-If CEO Carol Bartz is replaced, the stock could jump
2-Yahoo selling off some of its Chinese assets could monetize Yahoo’s value
3-The always existing risk that Yahoo could be acquired at some point
4-Yahoo has a lot of cash and assets and almost no “value” assessed to everything else. If Yahoo could just manage to get on the right track, its stock could rise again

I had discussed the risks of being short Yahoo but I’m betting on the fact that status quo seems to be the best Yahoo shareholders can hope for these days and if that’s the case, I should be fine on this trade.

Disclosure: No positions on Apple (AAPL) or Yahoo (YHOO)

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