Four Reasons Why I Covered My Yahoo Short

On Wednesday I covered my Yahoo (YHOO) at $26.90 for a 16% gain. There were a few reasons for the move, but none of them was a new-found enthusiasm for what Yahoo is doing. Essentially, there are a lot of catalysts that could move the stock higher from current levels, and most of the bad news is already known. The risk-reward for Yahoo stock is no longer is attractive from the short side, in my view. Here are my four reasons for covering:

1) Trading at the Low End of a Trading Range

The stock seems to be in a trading range from the mid 20’s to mid 30’s. Business at the company has hardly been stellar, but the shares seem to have a floor around the current level. It appears things would have to get meaningfully worse from here (which is unlikely) for the shares to make meaningful new lows.

2) Terry Semel’s Potential Ouster

The firing of CEO Terry Semel would certainly give the stock a boost. I don’t have odds or a timetable for his exit, but if things don’t improve quickly, I can’t imagine he will be keeping his job for much longer.

3) The Possibility of a Buyout or Merger

Although talks with Microsoft (MSFT) broke down in the early stages, when that rumor hit Yahoo stock jumped 20% overnight. That was scary for shorts like me, obviously. I was fortunate that I didn’t cover then, when others did (a deal with Microsoft didn’t seem likely, as I wrote at the time), and the stock has come back to pre-rumor levels. However, it’s not really an experience I want to have again. While I don’t think the odds of a deal are above 50/50, liquidity and deal flow are so impressive these days, it’s hard to feel good about being short a stock that could find a dance partner if they wanted to.

4) Panama Will Show Results Eventually

Optimism from management was a little premature, but I have little doubt that Panama will show some positive results at some point. The stock rocketed above $30 the last time this was thought to be imminent, so the same thing could happen if it actually comes to fruition as management suggested months ago.

All in all, the risk-reward in the Yahoo short position below $27 per share isn’t compelling enough for me to justify keeping the trade on. As a result, I have booked my profit and will look for other opportunities.

Full Disclosure: No positions in the companies mentioned at the time of writing

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2 Thoughts on “Four Reasons Why I Covered My Yahoo Short

  1. Zach on June 14, 2007 at 1:29 PM said:

    Nice trade – that took some confidence holding the short when the rumor hit the wires. Do you usually operate with a target stop level and if so how close did the stock come to kicking you out?

  2. Chad Brand on June 14, 2007 at 1:37 PM said:

    Thanks. I’m much more of a fundamental investor than a technical one, so I don’t use stops. I just didn’t believe the rumor, so I held tight.

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