NEW YORK (TheStreet) -- Counting out a colossus like Yahoo! (YHOO) for the flavor of the week is Investor Folly 101.
Yahoo! surrendered the top spot for desktop web traffic to former number two Google (GOOG), according to the most recent ComScore data. The competition has waged for years with Google as the leading website. Microsoft (MSFT) and Facebook (FB) are number three and four respectively.
Yahoo! CEO Marissa Mayer has been on the job for less than two years after being recruited her away from Google. When Yahoo! pulled ahead of Google last year in this metric, it appeared Mayer was making quick progress, but the stock is down nearly 4.4% for 2014 at $35.90 after the bell on Friday.
Also, most of the past 52-week gains result from investment appreciation rather than operational improvements. For investors, this means the waiting game continues, while being more acceptable after last year's soaring stock rise. If you missed the first leg higher, you still have time. The era of missing operational profits should be ending.
Battleships don't turn around on a dime and neither will the market's second-largest website. Those willing to allow Mayer a year and then demand results are either disingenuous with their portfolios or don't understand that results tend to come after the second or third change to fix an original problem.
The truth is Mayer hasn't been on the job long enough to effect meaningful improvements that are quantifiable on a balance sheet or income statement. Even so, the trend is clearly moving upward.
Ignore the spike higher from investment gains and focus on the underlying trend of the chart.
The chart above represents net income, and it's noteworthy because future income expectations is a primary stock price driver. The current forward earnings multiple is about 20. (The market is pricing the stock at 20 times the expected earnings during the next year.) This is misleading because the lion's share of market capitalization is based on investments in Chinese internet commerce giant Alibaba and Yahoo! Japan.
After removing cash, Alibaba and Yahoo! Japan, Yahoo!'s market cap falls from $36.1 billion to about $6 billion. Based on the company's core business analysis, the market is valuing Yahoo!'s operational profits at an earnings multiple of less than four.
I think Yahoo! should begin paying a dividend. It has the cash to do so and a dividend would attract an entirely new type of investor. A dividend would also go a long way towards reducing Yahoo!'s appeal to short sellers. At least the company is spending cash to reduce the number of shares trading in the float. All things being equal, a smaller float lowers the earnings multiple.
This makes Yahoo! one of the most attractively priced values in the stock market today. The only problem (and current shareholders are painfully aware of it) is that the rest of the market doesn't believe the value will be recognized any time soon. But I have a solution.Yahoo! is trading at $35.88, and an investor can sell the June expiration $35 strike put for $2.05 at the time of writing. Unlike buying the stock, as long as Yahoo! is trading above $32.95 at the time of expiration, the transaction will be profitable. At $33 a share buying the stock results in a loss of $2.88 plus the time utility between now and expiration. Selling an option results in slightly better than break-even.
Selling a put also has lower risk than buying shares. The most an investor can lose selling the $35 strike is $32.95 ($35 strike - $2.05 premium received up front). The downside is if Yahoo! takes off and soars higher, the maximum profit is the premium of $2.05.
An investor missing out on a large move won't feel too defeated sitting on a 6% gain in 64 days.
If you want more trading ideas along these lines, take a look at my Real Money Pro posts.
At the time of publication, Weinstein had no positions in any of the securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.