I’ve been experimenting with more and more paired trades in my personal accounts lately as the market overall hasn’t looked all that enticing to me over the last year or two. Yesterday I decided to take a position in the Google/Yahoo! trade that I have mentioned before on this blog.
At 42 times 2006 estimates, simply going long Google (GOOG) no longer has the risk-reward scenario that intrigues me. That said, Yahoo! (YHOO) stock at 62 times this year’s estimates looks even less compelling. There is little doubt that Google has been taking some market share from Yahoo! and many of the company’s recent quarterly reports have been lackluster as a result.
I decided to implement the long Google/short Yahoo! paired trade (at $403 and $32 per share, respectively) prior to both companies reporting their numbers this week (Google is due to release results on Thursday). YHOO’s second quarter reported last night looks unimpressive once again, but assuming that Google’s results will be equally as bad might very well be an overreaction.
I would expect that the P/E ratios of the two Internet search giants will eventually converge, which would yield a solid return from this trade. As always, opinions are welcome.
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That didn’t work out too well did it ? Maybe Long GOOG and short YHOO might have looked better in retrospect. Well atleast it looks like YHOO at current prices, may be a very good buy with a one year holding period in mind.
I suggest you reread the post you just commented on. As you will see, long GOOG and short YHOO was exactly the trade that was written about.
Good call, Chad. Are you tempted to cover after a quick 20% one-day gain?
Tempted? Of course, but I’m going to stick with it. I still see Yahoo! becoming less and less dominant on the web, and since the valuation gap seems irrational to me, closing out the trade after 24 hours might be leaving a decent amount of money on the table.
Google’s report this afternoon will be interesting. If the stock rallies strongly tomorrow I’ll be thrilled, but a disappointment and much of the trade’s gain might evaporate.
You must be a happy man, Chad. Good call.
JW
The Confused Capitalist