Throw This Stock Away

The house rules are simple in this weekly column:

• I bash a stock that I think is heading lower.
• I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Yahoo! (Nasdaq: YHOO  ) .

Stop wearing purple?
The Yahooligans posted mixed quarterly results night. Earnings soared 53% to $0.15 a share, though revenue before traffic acquisition costs inched down marginally to $1.13 billion.

Investors would normally cheer this disparity as a margin-widening victory, but the bottom-line improvement is partly the handiwork of Microsoft's (Nasdaq: MSFT  ) smoke and mirrors. The software giant is providing search-engine cost reimbursements as Yahoo! migrates to Microsoft's platform.

Factoring out those payments, Yahoo! missed Wall Street's top-line target, landing just ahead of the pros on the bottom line.

A few years ago, Yahoo!'s Asian investments supported its share price. Now that many of those investments have taken a hit, the brand-diminishing handoff to Microsoft is keeping the stock buoyant. Wouldn't it be great if Yahoo! -- like larger rival Google (Nasdaq: GOOG  ) -- actually had a bigger hand in its own value?

After all, Yahoo!'s results are fit for some head-scratching. Paid search -- Google's bread and butter -- actually fell 9% during the quarter, compared to last year's already depressed showing. Display advertising, typically considered search advertising's less lucrative eye candy, was the real workhorse, with its 19% year over year advance.

Overall, Yahoo!'s flat top-line performance, at a time when Internet usage is booming globally, is all one needs to know about the company's fading relevance in the dot-com space it once dominated.

I do like some of Yahoo!'s recent moves, including its recent purchase of cheap content creator Associated Content. However, it's hard to get excited about a company where analysts see revenue growing by less than 2% this year, and only 4% come 2011. If you're going to invest in the high-growth Internet sector, you need better growth than that to justify the risky leap.

I won't fall into the bear trap of pointing out how Yahoo!'s multiple is too high relative to its sector in general, and Google in particular, because I know the value of Yahoo!'s foreign investments. However, stagnancy is stagnancy. Who cares if handing Microsoft the keys to its search engine will crank out juicy profits? It will come at a dear price, as users sidestep Yahoo! for search entirely.

Yahoo! isn't a broken stock. It's profitable, cash-rich, and generating reasonable cash flow. However, you can do so much better in this space.

Good news, everyone!
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

Baidu.com (Nasdaq: BIDU  )
If you're going to take a chance on Internet search, you may as well go all in with Baidu. At 37 times next year's projected profitability, it's not cheap, but China's leading search engine has plenty in the tank. Wall Street sees Baidu's bottom line more than doubling this year, and soaring 57% next year. If investors want exposure to China's booming Internet economy, but are afraid of Baidu's valuation, Sohu.com (Nasdaq: SOHU  ) -- the parent company of the much smaller and slower-growing Sogou -- is fetching less than 10 times next year's bottom-line target.

Internet Brands (Nasdaq: INET  )
Following Yahoo!'s content-acquisition strategy by bulking up on page views to grow its display ads, Internet Brands is a collection of sites in the heavily targeted housing, automotive, and travel niches. There was a monthly average of 58 million unique monthly visitors across the company's portfolio during the first three months of the year, up 22% from the same period a year earlier. The pros see revenue and earnings growing at double-digit clips.

IAC (Nasdaq: IACI  )
Barry Diller's IAC owns Ask.com, the country's fourth-most-popular search engine. It's only fair to point out that the former Ask Jeeves site is a distant No. 4 to Google, Yahoo!, and Microsoft's Bing, but with $1.5 billion in cash and marketable securities against a $2.5 billion market cap, IAC's enterprise value clocks in at barely more than $1 billion. Ask.com is also just half of the story here, since IAC derives the other half of its revenue through a wide collection of popular sites including Service Magic, Citysearch, and dating website Match.com.

I'm sorry, Yahoo! I didn't mean to be a purple people eater.