The Yahoo! Panic Hasn’t Stopped the Uptrend

On Tuesday, Yahoo! (YHOO) warned that its ad revenue growth was slowing.

 

Specifically, the Internet giant commented that automobile and financial companies were not buying ad space at the pace they were before. Consequently, the company now anticipates third quarter revenues at the lower end of its projected $1.1 billion to $1.2 billion range.

 

Shareholders of Yahoo! and every other internet stock on the planet reacted like the God of the Old Testament and smote the sector something fierce: Yahoo! shares dropped 13% in one day. The Internet ETF (HHH) plummeted... and bounced.

 

It’s just another case of investor emotions gone out of control. Yahoo! didn’t even state that it would miss estimates, just that its results would be at the lower end of its expected range!

 

But it’s presented us with another great buying opportunity.

 

Internet stocks have been in a strong uptrend in the last couple months. And the fact that the ETF bounced right back above its 50-day moving average after a sell-off of this magnitude indicates that this uptrend isn’t over yet.

 

There’s also a historic trend here. Historically, the Internet sector has performed well in the fourth quarter. Looking at a three-year chart for the Internet ETF, you see strong rallies starting in both September ’04 and September ’05.

 

 

 

Internet stocks are still cheap. The four largest holdings in the Internet ETF: Yahoo!, eBay, Time Warner, and Amazon are all still trading significantly below their historic valuation multiples.

 

Internet stocks are now even more out of favor than before. The uptrend is still going. And best of all, these stocks are entering a period in which, historically, they’ve staged strong rallies.

 

Don’t write off this sector just yet. You may end up smiting yourself in the process.

 

Good trading,

 

Graham

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