A Foolish Trick: Yahoo!

Hot stock tip No. 1: Don't buy a stock that has to put an exclamation point at the end of its name to generate excitement. It surely didn't work for Yes! Entertainment. Yum! Brands (NYSE:YUM) may prove to be a notable exception. And then we have Yahoo! (NASDAQ:YHOO) -- dear Yahoo! -- that now finds its stock trading at its lowest point in more than two years.

Oh, and what is it with companies that begin with the letter Y and those exclamation marks?

Hot stop tip No. 2: Don't buy a laggard even if it's in a growth industry.

In the element of full disclosure, I have to admit that I love Yahoo! Finance and would hate to see this stock -- an active Motley Fool Stock Advisor recommendation -- fail. The problem is that as promising as the paid-search space has become, Yahoo! is starting to feel like the pioneer that let progress happen all around it while it remained stagnant.

My life as a Zax
I hate to cast Yahoo! as a relatively obscure Dr. Seuss character, but you've got to wonder whether it has been growing into the role of the South-Going Zax that bumps into the North-Going Zax and refused to budge as the world changes all around it.

How bad have things gotten for Yahoo!? Let's look at how the company's bottom line has panned out over the past four quarters.

Let's face it. Yahoo! has had pretty lousy timing over the past few years. It sold its stake in Google (NASDAQ:GOOG) too soon. It launched its Yahoo! Publisher Network to compete against Google AdSense too late. It overpaid for Broadcast.com and GeoCities. It failed to pay up for destinations that truly matter these days like MySpace and YouTube.

Yahoo! can't get the balance right. We saw that after the company's frightening third-quarter report earlier this month. But some of the hopeful see the next generation of the company's paid search technology as a savior.

Dredging the Panama Canal
Panama can be many things. It's a country. It's a hat. It's a Van Halen song. It is also the code name for a new advertising platform that Yahoo! hopes will help it make a dent in Google's sizeable market share.

The company hopes that Project Panama will help it improve its search monetization, but the platform has been delayed, and now it's being rolled out in stages (that's a corporate tactic for having something to fall back on in case its fourth-quarter results don't improve substantially). Even though Yahoo! was ahead of the pack a few years ago when it acquired paid search pioneer Overture, now it is chasing Google and Microsoft (NASDAQ:MSFT) is nipping at its heels. A new platform that is more Google-esque is unlikely to result in a broader reach of advertisers and Google has already taken most of the best third-party publishers with its Google AdSense program.

Where will the growth for Yahoo! come? A better advertising platform? A better search engine? IAC/InterActiveCorp (NASDAQ:IACI) has an amazing engine in Ask.com with its thumbnail landing page previews, yet it still is a bit player in the search-engine saga.

Yahoo! is trading at more than 50 times this year's recently hosed-down profit targets and nearly 40 times next year's projections. It's going to have to pick up the pace, and that's a tall order when you are fading deeper into the pack.

Sure, Yahoo!'s valuation may be justifiably inflated, given its 34% stake in Yahoo! Japan. With Yahoo! Japan commanding a market cap of $24 billion, that minority position in Japan's top web portal is good for $8.3 billion in Yahoo! stock (or nearly $6 a share). The problem is that Yahoo! Japan may be in for a tumble too. It grew its profits by all of 22% this past quarter, and that was with flat growth in paid search. Even if you back out smaller foreign investments in Gmarket, AliBaba, and its cash balance, Yahoo! is still overvalued given its anemic growth rate.

Turning exclamation points into question marks
This doesn't mean that Yahoo! is doomed. If the stock should fall into the mid-teens, I'm there like Homer Simpson on a jelly doughnut. Even though I may have been critical of the company in my "Buy Google, Sell Yahoo!" article before the company's latest disappointment, there are still a lot of things I like about Yahoo! like Yahoo! Answers, del.icio.us, and Flickr that I think are leading the way in smaller niches.

Leading the way? That has to feel a bit nostalgic for a company like Yahoo! these days. Let's hope the South-going Zax compromises its pride and finally starts making all of the right moves.

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Yahoo! is a Motley Fool Stock Advisor recommendation. Microsoft is an Inside Value newsletter selection.

Longtime Fool contributor Rick Munarriz is a huge fan of Google and it would be his homepage if it weren't for Fool.com taking up that piece of real estate. Yahoo! Finance is also one of his favorite bookmarks. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Ghoul's Tricks or Treats represents the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc., or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool's disclosure policy .