On Yahoo!: Fabulous, Frightening and Awe-Inspiring

Today's Yahoo! move has options players wondering when the concept of gravity might hit the stock like a lead balloon.
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Out With the Old

SAN FRANCISCO --

Yahoo!

(YHOO)

took its place in the pantheon known as the

S&P 500

tonight (as if you didn't already know).

Ahead of that move, Yahoo! shares rose 24% to an all-time high of 348 today, culminating a 63.6% rise since the

Standard & Poor's

announcement on Nov. 30.

"Absolutely crazy" and "ridiculous" is how one money manager who is long the stock described Yahoo!'s performance, leaving me to wonder how those

short

it are feeling. And there are quite a few; the short position in Yahoo! totaled 14.2 million shares today, according to

Bloomberg

.

Tim Koogle's company has turned anyone recently betting against its stock into noodle kugel (or a potato one, if you prefer). In December alone, Yahoo! has added $35.6 billion in market cap, bringing its total to $91.5 billion, based on the roughly 263 million shares outstanding.

Following Yahoo!'s lead, the

Nasdaq Composite

stormed to yet another record high

today, while blue-chip averages sulked yet again.

"It's so fabulous, frightening and awe-inspiring and every other adjective you can think of," Scott Bleier, chief investment strategist at

Prime Charter

, said about tech stocks in general and Yahoo! in particular. "We know at some point there will be a paying of the piper. My feeling is it will come in the last week of December

and/or the first week of January. But, right now, you just have to enjoy the party. Everybody is expecting the market to go ape in January. Well, it's going ape now."

Bleier, whose firm has done no underwriting for and has no position in Yahoo!, pointed out the December 330 Yahoo! calls -- $18 in the money -- were offered at 27 3/4 at the close. There are no puts in the money, he noted, the closest being the 330s -- $18 out of the money -- which were offered at 23 3/4. (

TSC's

Options Buzz reporter

Erin Arvedlund

noted there was an 11,000-share trade of deep-in-the-money 300 calls right at the bell today, likely as a proxy for investment in the common stock.)

"The put-sellers know the stock is going lower," he said, and thus have priced the puts accordingly. "The only way to profit from the drop in the morning

assuming it does is to sell it short. And for that, you need a lot of money."

Not to mention chutzpah.

Before this most recent stand-convention-on-its-head move by Yahoo!, Jeffrey Applegate, chief investment strategist at

Lehman Brothers

, took on the implications of the stock's inclusion into the S&P 500. In the process, he proved

Jim Cramer is

not

alone in admitting the old-school methodology just ain't cutting the mustard anymore.

In his report titled "The Virtual Economy: Further Moving the Mean," Applegate estimated that Yahoo! will represent 0.5% of the S&P 500 vs. 0.2% for

Laidlaw

(LDW)

, the company it replaced. When Applegate put his piece together late last week, Yahoo!'s price-to-earnings ratio was roughly 340 times the consensus 2000 estimate of 68 cents a share (after today, it's trading at 512 times). Compared with Laidlaw's P/E of 9 times, he estimated the replacement of Laidlaw by Yahoo! would raise the S&P 500's P/E by 0.3 to 24.5, based on 2000 estimates of $55.80. (After today, the S&P is trading at 25.3 times.)

Similarly, when

America Online

(AOL)

replaced

Venator

(Z) - Get Report

last year, the S&P 500's 1999 P/E multiple rose by 0.2 to 23.4.

But while many pundits decry the stretched valuations of the S&P 500 (much less individual tech names), Applegate is downright OK with it.

The strategist finds bearish arguments "wanting" because many are predicated on the "notion of mean reversion" to some metric, be it dividend yield, P/E, equity yield or "whatever," he wrote. "Our view has been that the mean is moving, largely due to the technology revolution and globalism ... and avoiding U.S. equities based solely on bearish, mean-reverting valuation arguments will continue, we think, to be a mistake."

Furthermore, changes to the mean are not unprecedented, he argued, noting IPOs of companies without profits were once unthinkable: "Now, nobody blinks an eye." (Except maybe to make sure they're not misreading the opening-day gains of some profitless new issues.) Similarly, prior to 1958, it was considered sacrilege to suggest the equity market's dividend could remain below the bond yield for very long, he wrote.

"For whatever reasons, people's perceptions of risk and value changed radically back then," he continued. "We strongly suspect that they're changing again now."

Applegate foresees the process continuing, with the perception of what constitutes a "high" P/E for the S&P continuing to widen while its dividend yield falls. This will result "as faltering companies exit the market index and new successful ones enter," he wrote. "A growing number of those new entrants are likely to be the virtual economy ones."

The strategist does not go so far as to predict their entrance into the S&P, but mentions

eBay

(EBAY) - Get Report

,

Lycos

(LCOS)

and

priceline.com

(PCLN)

as potential future candidates because they are profitable or are "becoming so."

Lehman Brothers has an underwriting relationship with AOL, but none of the other stocks mentioned above.

Applegate was on jury duty today and thus unavailable to respond to follow-up questions regarding either this subject or whether forecast changes by Lehman's chief U.S. economist will force revisions by the equity strategist, as mentioned in

last night's column.

Appreciate the Love

Speaking of last night's column, it sparked a surprising response, both in terms of the volume and tone of emails.

One reader surmised that I "must be short" to have dared mentioned

Tyco

(TYC)

and

JDS Uniphase

(JDSU)

in the same breath.

To misquote the

Fonz, "Incorrectamundo!" To that reader and anyone else unfamiliar with

TheStreet.com's

strict policies on investing, I urge you to read the disclaimer at the bottom of this (and every) column.

Finally, another emailer wrote that I always seem to be "wishing the markets a serious fall. You are not a journalist, you're just a man with a vendetta against society."

So let it be written, so let it be done. From now on, this column shall be dubbed "The VendettaMaster." Or maybe, "The Anarchist."

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.