The Contrarian Blog

Bulls Favor Yahoo! Despite Stock's Struggles

by Karee Venema 5/23/2012 11:02 AM
Stocks quoted in this article:
Publication: "CNN/Money"
Publication title: "Yahoo: The hottest tech stock in the Valley?"
Publication Date: 5/21/2012
Brief Summary:

The author of this article gives Yahoo! Inc. (YHOO) something it's been lacking for awhile: a bit of positive feedback. Despite the company being viewed by some as "desperate" following the patent infringement case it brought against sector peer Facebook (FB) in March, the author contends the Internet issue has displayed "a little bit of momentum" as of late. Specifically, the stock recently gained ground after the company cashed in on a portion of its stake in China-based Alibaba Group, garnering YHOO a cool $7.1 billion.

However, the author warns that it's best to tiptoe toward YHOO in the near term. The company's fundamentals have long been considered shaky; the company has gone through seven CEOs in the past 11 years. Plus, YHOO's plan to use the proceeds from its recent fundraising effort to up its stock buyback program -- as opposed to reinvesting in research and development -- has raised some eyebrows. The author concludes, "the bottom line for Yahoo is that it still needs to figure out what it wants to be."

Contrarian Takeaway:

From a technical perspective, YHOO's time on the charts has been choppy. The stock's year-over-year and year-to-date deficit differ by just two-tenths of a point, and for the greater part of 2012, the security has been stuck trading in the $14-$16 range. YHOO's chart troubles are further evidenced by its 160-week moving average. The equity has only been allowed one weekly close by this overhead ceiling since mid-February.

Investors, it seems, have turned a blind eye to YHOO's fundamental and technical woes. Among the options crowd, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open nearly four calls for every put during the past 20 sessions. Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.43 shows that call open interest more than doubles put open interest among options set to expire within the next three months.

Elsewhere, short sellers cashed in their bearish bets by 33.4% over the last two reporting periods, and short interest now accounts for a low 1.95% of the stock's available float. In fact, short interest is currently sitting at a two-year nadir.

From a contrarian perspective, the lack of negative investor sentiment has left a rather paltry supply of sideline cash available to lift the stock out of its range-bound price action. With buying power limited, YHOO could be poised to encounter some additional headwinds in the near term.

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