Yahoo! Becomes Hedge Fund Target as Traders Manipulate Price Lower

NEW YORK (TheStreet) -- Yahoo! (YHOO) is now the playground stock for hedge funds.

This phenomenon happened regularly in the old days of Apple  (AAPL) and now we're seeing it in Yahoo!. These hedge fund money managers have manipulated a situation in which Yahoo!'s share price has crashed through what should have been a floor at $42 a share by turning Yahoo! into a hedge against long Alibaba positions. The stock is currently trading below $39, which has Bloomberg's Matt Levine saying Alibaba could effectively buy Yahoo!, its investor, for free.

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It's this kind of sentiment is what the hedge fund managers like to see. Dishing on a stock to drive down its price, if they know the company has the potential to later see its share price jump. It's the buy low, sell high strategy on steroids in which hedge funds call the shots. 

Since Alibaba (BABA) launched its IPO on Friday, Yahoo!, which owns a 16.3% stake in Alibaba, has seen its shares take a tumble. Yahoo!'s stock, which traded as high as $43.19 a share on Friday as Alibaba's IPO soared, has fallen by 12.2% over the last several of days to close at $39.05 a share Tuesday. Granted, Yahoo!'s price managed to post a 1.03% gain yesterday, but overall it's still down by double digits. From a fundamental perspective, what's good for Alibaba should also be good for Yahoo!. From a technical perspective, it may take some time before the market gives Yahoo! a proper valuation.

Yahoo!'s gain on Tuesday prompted traders in New York to begin short covering because Alibaba was down $2.72 a share to $87.17, while Yahoo! as a hedge bet was in positive territory. The hedge wasn't working. A short squeeze should happen soon as hedge funds snap up more Yahoo! stock to cover the Yahoo! stock that they already sold. We all know where this is headed, but we aren't sure about the timing.

How low of a price will the big money hedge funds  try to manipulate Yahoo!? We have no idea. They have no idea. They'll take it as low as the market allows. For today at least, we've seen the first sign of an uptick over the last seven days. There will come a time, however, when all those investors who shorted Yahoo!'s stock will have to turn around and buy it to cover their short selling of its shares. We currently own a 15% allocation of Yahoo! and would like to eventually own a 50% allocation once we're confident in the post-IPO turn. 

With Alibaba flush with cash after its IPO, it could make a play for Yahoo!, its investor. Here's how that could work, according to Levine:

If Alibaba offer's Yahoo! $7 billion in cash, along with 384 million of its shares, that represents an 8% premium to Yahoo!'s current price. Of course, we know that Yahoo! has $7 billion in cash on its balance sheet, which would immediately cover the $7 billion Alibaba would pay to make the acquisition. Also, Yahoo! already has 384 million shares of Alibaba, so in essence Alibaba would also be getting its stock back too. That's why a Yahoo! buyout under these terms would be free for Alibaba. 

The hedge funds know this. Alibaba knows this. Masayoshi Son, founder and CEO of Softbank, knows this. Microsoft knows this. Ten other entities, including Carl Icahn, are closely watching this. Something big will eventually happen and those who bought Yahoo! on its manipulated low price will profit exceedingly well.

Must Read: Yahoo!'s Slide From Alibaba's IPO Continues: What Wall Street's Saying

Our prediction is that a deal is already in the works. Not between Alibaba and Yahoo!, but rather between Softbank, which holds a 34% stake in Alibaba, and Yahoo!.

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