Google Crosses $400

After hitting $398 twice in recent weeks, shares of Google (GOOG) have surpasses the $400 level today. With the run-up continuing, it is becoming harder to justify buying shares at current levels. In fact, should the forward P/E reach 50, I will likely trim my positions in Google for the second time this year. That said, I still think Google will outperform the market for the next several years.

If you are intrigued by Google stock, but are not willing to shell out 47 times earnings, consider this less risky alternative. A paired trade with Google and Yahoo! (YHOO). Despite brigher growth prospects, higher margins, etc, Yahoo stock trades at 55 times forward earnings, a premium that is interesting. Google is expected to grow sales and earnings in 2006 by 60% and 44%, respectively, versus only 28% and 30% for Yahoo.

A common argument for why Yahoo deserves the premium is its diverse product line. It’s true that Yahoo brings in revenue from more areas than Google does, but I suspect Google’s growth strategy will allow for product diversification in coming months and years.

So, if you are skeptical of the valuation gap between these two Internet leaders, a less aggressive way to play them would be going long GOOG and short YHOO. I had success with this strategy when Yahoo’s market cap exceeded Google’s earlier this year, and I think the trade has more room to run.