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The Symbiotic Struggles of Yahoo! Inc. (YHOO) and Alibaba Group Holding Ltd (BABA)

Two tech companies, Yahoo! Inc. (NASDAQ:YHOO) and Alibaba Group Holding Ltd (NYSE:BABA), which have seen much better days, continue to struggle. Both stocks have lost ground since the beginning of the year amid a string of negative news, such as the recent refusal by the IRS regarding a private ruling relating to the proposed tax-free spinoff of its 384 million-share stake in Alibaba Group Holding Ltd (NYSE:BABA).

In the last couple of days, Yahoo! Inc. (NASDAQ:YHOO) has seen its price target cut by a number of analysts, although most of them reiterated bullish ratings like ‘Buy’ or ‘Outperform’. Among these, Pivotal Research Group lowered its target to $34 from $43, while Mizuho and JP Morgan cut their price targets to $43 and $44 respectively.

Alibaba Group Holding Ltd (NYSE: BABA)’s stock took another hit after investor-relations chief Jane Penner, speaking at a conference, appraised the investors, that considering the downturn in the Chinese economy, the gross merchandise value, a key figure for the e-commerce giant, will be mid-single digits lower than what was initially expected and will therefore impact the top line of the September quarter.

Alibaba Group Holdings Ltd (NYSE:BABA)

Even though the latest developments put a negative stance on the stock, it’s far more important to see what smart money has to say about Yahoo! and Alibaba. Even though hedge funds from our database didn’t change their positions in both companies during the second quarter, they are fonder of Yahoo than Alibaba. And later on you will see why.

We look at the hedge fund sentiment that surrounds a stock because this group of investors are exceptionally skilled at picking individual companies. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 60 percentage points (read more details here).

In this way, among the hedge funds we track, a total of 104 investors held long positions worth $5.92 billion in Yahoo at the end of June, down from $6.48 billion at the end of March, amid a 10%  slump of the stock during this period. As for Alibaba, the number of investors with long positions slightly declined to 85 investors, holding $4.77 billion worth of stock at the end of the second trimester as compared to 86 funds with $5.79 billion a quarter earlier.

One of the reasons why investors bet on Yahoo is the spin-off of its equity position in Alibaba, which represents intrinsic value not reflected in its current stock price. Among the funds from our database, Daniel S. Och‘s Oz Management and Christial Leone‘s Luxor Capital Group are the two largest stockholders of Yahoo! Inc. (NASDAQ:YHOO) within our database. While Oz Management reduced its holding by 2% in the June quarter to 14.39 million shares valued at $565.32 million, Luxor Capital hiked its stake by 19% to 12.64 million shares valued at $496.81 million.

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