More Reasons to Avoid Yahoo (Nasdaq: YHOO) Stock

There's been no shortage of reasons for investors to avoid Yahoo! Inc. (Nasdaq: YHOO) stock this year.

Yahoo, once revered as a web pioneer, has been stunted and dwarfed by those who followed in its footsteps.

The storied Internet content company has been upset by an increasing number of competitors like search engine behemoth Google Inc. (Nasdaq: GOOG) and social networking giant Facebook Inc. (Nasdaq: FB), and been wounded by waning ad sales.

Yahoo also is very late to the game in the battle for the mobile space, currently the biggest area of growth for the industry.

And then there is the question of diminishing revenue, declining earnings and slumping stock price.

Revenue fell by more than a fifth last year. Yahoo's stock price has slipped 17% over the past year, and 50% over the past five.

"Yahoo just can't get its act together," Money Morning tech guru Michael A. Robinson warned in January, naming Yahoo a "tech stock to avoid" in 2012. "While key executives were napping, Google burst on the scene a decade ago and rewrote the rules of web search and advertising. Portals like Yahoo never regained their traction."

As Yahoo's struggles continued, CEO Carol Bartz was recently let go with a phone call in September. In January, former PayPal president Scott Thompson was brought in as Bartz's successor.

And now the latest replacement may soon be replaced himself.

The Revolving Door of Yahoo Leaders

On May 3, CNN broke the news that activist investor Daniel Loeb, head of hedge fund Third Point, accused Yahoo CEO Scott Thompson of padding his resume.

At issue were discrepancies in Thompson's education record. For years, Thompson boasted about holding a degree in computer science, but according to records from Stonehill College, the small Roman Catholic school in Massachusetts Thompson attended, he actually graduated with a degree in accounting.

The embellishment didn't go over too well with shareholders, employees or Yahoo's board.

On Monday May 7, Thompson e-mailed an apology to Yahoo employees about inflating his academic credentials. The e-mail focused more on the work at hand and in moving the company forward than the highly publicized and ostracized gaffe.

Yahoo announced Tuesday they would form a three-member board committee to investigate Thompson's hiring and his fate, according to The New York Times, but Loeb maintains that is not enough.

In a letter to Yahoo Loeb wrote, "We believe that this internal investigation by this board must not be conducted behind a veil of secrecy and shareholders deserve total transparency."

The saga continued Tuesday when Yahoo director Patti S. Hart, who led the search committee that picked Thompson as CEO, announced she is stepping down.

Adam Seessel, director of research at Martin Capital Management, told Reuters the push to oust Thompson is a "head scratcher".

"If it were normal times, this would warrant a dismissal," Seessel said of Thompson's padded resume. "But he's so new and the company is in such a sensitive spot. Sometimes in the heat of the battle, you can't get rid of your commander … and a battle is going on."

Yahoo's mounting dilemmas come just weeks before it is likely to sell 15% to 25% of Alibaba Group's shares back to that company after lengthy negotiations. The transaction with Alibaba, parent of China's largest listed e-commerce company Alibaba.com Ltd., is expected to be structured to avert the complications that had obstructed earlier discussions, Reuters reported last week.

Avoid Yahoo (Nasdaq: YHOO) Stock

The lack of steady leadership is a huge flaw for Yahoo, and one that will prevent the company from strengthening this year.

"It's a revolving door at the top, which definitely makes Yahoo! a tech stock to avoid," said Money Morning's Robinson.

Co-founder Jerry Yang, who also served as CEO from June 2007 to January 2009, resigned Jan. 17 in the midst of shareholder ire.

"Yahoo suffered from the founder syndrome," Youssef Squali, a Jefferies Group Inc. (NYSE: JEF) analyst, told The Financial Times after Yang's resignation. "Nothing was good enough for his company."

Now Thompson could suffer the same fate as Yang and Bartz. Loeb and other vocal shareholders urged in a second letter to Yahoo Wednesday "to move past this embarrassing episode" and fire Thompson.

"After six days, we must ask — what is this board waiting for?" Loeb wrote Wednesday.

Yahoo failed to comment immediately on Thompson's future with the company.

[Money Morning's Defense and Technology Specialist Michael A. Robinson regularly offers insight on the best and worst tech stocks in his new free newsletter, Era of Radical Change. To subscribe to Era of Radical Change and receive Michael's latest report, "The Biggest Tech Breakthrough in 50 Years,"click here.]

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