How to Dump the Right Stocks to Buy the Alibaba IPO

NEW YORK (TheStreet) -- A few weeks ago, there was a popular hypothesis being bandied about on business television that investors might dump Yahoo! (YHOO) shares in order to buy stock in the upcoming Alibaba (BABA) initial public offering.

The thinking went, why would someone want to keep shares of Yahoo!, which only owns a piece of the Chinese e-commerce company, when they could buy Alibaba's stock directly?

Read More: 8 Stocks George Soros Is Buying in 2014

Sadly, those who took this advice, missed out on the move of Yahoo! shares from $32 in late July to a 52-week high of $42 on Tuesday.

It turns out that Yahoo! investors were under-valuing its total collection of assets and had to update the value of the shares once they started to realize that the valuation of the company's existing and remaining Alibaba shares would be much higher than expected.

Nevertheless, there may be something to this idea that investors might dump one stock in order to free up cash to buy another.

In general, I am a bit skeptical of this idea.

Remember all the "cash on the sidelines" that bulls have been saying might get put to work in this market? A lot of that excess cash might find its way into various mutual funds and hedge funds that decide to get into Alibaba shares.

Therefore, there may be no need to sell one stock to buy another.

However, it is fair to remember that this Alibaba deal is huge. The company is expecting to sell $22 billion worth of stock.

That means that underwriters are likely hoping to gin up interest among investors to buy about $60 billion of the stock to cause enough pressure to push up the price of the deal.

Read more: Alibaba Chooses NYSE for IPO

If they are going to stoke that kind of demand, it is quite possible that we will see some selling pressure.

In the case of Facebook (FB)  a couple of years ago, we saw a real weakness in Google (GOOG) in the four months leading up to the Facebook IPO. Then, once Facebook shares started trading and the stock seemed to immediately start dropping, Google's stock started to move up for the next several months.

So this phenomenon does happen.

For Alibaba, I don't think there will be a big pullback in Yahoo!'s stock.

The stock that might be most affected is Amazon (AMZN) . People might see Alibaba as a long-term threat to Amazon as it starts to expand outside China.

Also, on a relative basis, seeing just how big and yet how profitable Alibaba is raises the question of why Amazon hasn't been able to walk and chew gum at the same time as well.

The other stock that could be hurt the most in the next several weeks is Baidu  (BIDU) . It has had a great year, but it is much smaller than Alibaba will be.

People could use it as an ATM to draw some cash out in order to put in bigger orders for Alibaba.

Some have speculated that the smaller Chinese Internet names might also see a selloff.

But these are much smaller than Alibaba. To take out money from these, big mutual funds won't see the needle move much in terms of excess cash that they can put to work in Alibaba orders.

Read more: The Alibaba Madness Begins

The bottom line is pick the right companies to dump in order to buy Alibaba.

At the time of publication, Jackson owned shares of Yahoo!.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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