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Revisiting the Google/Yahoo Paired Trade

July 19, 2006 Chad Brand, Peridot Capital Management LLC
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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.

In tech and telecom
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Peridot Capital Management LLC is a registered investment advisor in the states of Maryland, Pennsylvania, and Washington. The firm may not transact business in states where it is not registered or exempted from registration. In most states, the firm is exempt from registration if it has fewer than six clients who are residents of that state. As a result, Peridot Capital Management LLC is free to provide services to residents of every state and applies for registration as required. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

The content published on our blog represents the opinions of Mr. Brand and he and/or his clients may hold positions in securities discussed. Such positions will be disclosed at the time of publication, although subsequent changes to those positions will be made without notification. The information contained in blog posts is believed to be accurate when published, however, mistakes could be made. As a result, do not rely on the content exclusively for your investment due diligence. The commentaries published do not constitute investment advice, as readers’ personal investment goals and risk tolerances will dictate which investments are appropriate for them. Our blog is meant to be one of many sources for readers to conduct their own research into specific investments. Consult an investment professional before acting solely on information found on this site. If you do not have an investment professional to work with, you may contact Peridot Capital Management LLC directly.