Saturday, September 20, 2014

YAHOO's a Treasure Chest And a BUY

Silly.  That's what I thought of investors who were dumping shares of Yahoo (YHOO) on Alibaba's (BABA) public birthday.  On Friday, YHOO traded between a high of $43.19 and a low of $39.55.  That's almost a four point swing!  Not surprisingly, the stock reached its high for the day within the first hour or so of trading.  The NYSE gave BABA underwriters all of the time they needed down on the trading floor to set their opening bid/price.  BABA was being touted as the anti-Facebook Initial Public Offering (IPO), so those responsible for leading the offering, lucky Goldman Sachs, took their sweet time to make sure everything was on point.  And it turned out to be that indeed by day's end, with BABA closing some 38% up at the end of the trading day.

But back to Yahoo.  Many investors of Yahoo were befuddled by the sudden loss of capital they experienced while owning shares of the stock on Friday.  Many of them pulled the trigger and sold, allowing their emotions get the best of them.  I was on the other side of the trade, scooping up shares!

Why did Yahoo drop?  See, Yahoo, before Alibaba went public on Friday, was an Alibaba play.  Since    many institutional and retail investors could not get their hands on shares of the company, the next best thing was owning Yahoo.  Yahoo's stake in Alibaba prior to selling shares on Friday: 524 million shares!  YHOO investors had bid up the shares in previous weeks, and those gains were as a result of the information they received regarding the share price BABA would command at the start.  So the stock's recent rise was attributed to the nearing of the BABA IPO.  Once BABA went public, BABA investors didn't need to own YHOO anymore.  They could buy BABA for themselves now!  Thus, they dumped their YHOO shares in order to buy BABA shares, leaving only the true YHOO believers behind.

Many, I including, believed that YHOO shares would rise as the price of BABA climbed, giving YHOO more of a payday.  After all, starting at $80/share is great, but being able to sell shares at $99 (BABA's high) is even better.  I'd purchased shares in the low $42's the previous day, thinking YHOO would go higher after locking in some serious cash.  I was wrong.  But as an experienced investor, I figured out my mistake right away, seeking an explanation, which I got sometime in the middle of the day.  I had to make another decision.  BUY/HOLD/SELL.  I bought more of it.  As the price of the stock trickled downward, I doubled down around $40.5.  And this is what brings me to telling you what being a stock investor is really all about:

Investing in stocks is about making a bunch of objective decisions, nothing more, nothing less.  It's not about personalizing your good or bad decisions.  Things happen.  Unexpected things happen.  It's not about faulting yourself if you lose money, or patting yourself on the back if you make money.  There is always money to be made!  In fact, making money is easy!  Now...knowing how not to lose money...that is the stuff!

My premise for buying shares of Yahoo prior to the Alibaba IPO involved liking the extremely favorable position Yahoo, the company (not the stock), would be in monetarily from cash proceeds gained when ringing the register.  In one fell swoop, Yahoo made over 9 billion dollars, over 5 billion after taxes, from selling 120 million shares.  That's a lot of cash.  And after a year, when more shares get unlocked (YHOO is not allowed to sell any more for this time frame), YHOO gets to print money again!  Yes, I said print money.  Here's a metaphor for you:  Yahoo is like a huge treasure chest filled with gold right now, sitting on the beach above a giant, "X."  Any pirate around? Coincidentally, Friday, September 19, was International Talk Like A Pirate Day.  Avast, me hearties!

Some investors don't like the company.  They feel Yahoo's underlying business, advertising, is weak and will continue to underperform in the near future at the helm of Marissa Mayer.  Here's what I know.  Yahoo is still in the top 5 most visited sites in the US.  It has acquired some companies that did nothing for earnings (Tumblr e.g.), true enough.  But it just got this windfall of cash.  Yahoo itself has become an acquisition target.  Who wouldn't want to buy a company that has an excrement load of cash and more to come in the future?

Companies acquire other companies for growth, earnings growth to be specific.  A perfect way to boost growth is to buy a company that is cash strapped, like Yahoo.  Potential buyers could be Softbank or even Alibaba!  Softbank, run by CEO, Masayoshi Son, was the other winner of the day, owning an even bigger BABA stake.  Masayoshi Son and BABA CEO, Jack Ma are buddies.  YAHOO has a spin off (YAHOO JAPAN) in Japan.  So the potential for Yahoo to be bought is there.  But let's assume it won't happen.  We don't know the probability, i.e., the numbers associated with this event.  So instead let's just call it a "possibility" and consider other scenarios.  Here they are:

A) Yahoo continues to buy more of its shares, reducing its outstanding shares (float), improving its earnings per share, therefore, and investor equity.

B) Seeking growth, Marissa Mayers approves the purchase and acquisition of another company, e.g., AOL.  This possibility has already been mentioned in the news.

C) Yahoo does both A and B

D) Yahoo does nothing, except ride the price of BABA up, selling its stake of BABA for the next few years and making its cash vault plush.

Where in any of these scenarios is there a danger to the company?  

If the underlying company sans the BABA ownership performs even worse over the coming years, it is still a favorable situation for investors as this will make Yahoo more of an acquisition target.  If Marissa Mayer gets her act together and actually uses the cash wisely to improve operations, then this too bodes well for investors.

On Barron's magazine this weekend, "Best Way to Play Alibaba: Buy Yahoo!", Barron's estimated Yahoo's assets to be worth 58 billion, translating to $58/share.  This does not include taxes.  Nonetheless, there is a wide margin of safety there for investors.  Barron's assumes that 12 billion would be shaved off from the overall after taxes, making the shares valued at $46 dollars each.  That's 12.4% upside from where the shares are now!  On Monday, there could be more selling.  If so, this could present a compelling entry point for new YHOO investors.  If it dips again, I'd buy!

Note: From a technical analysis standpoint, the next level of resistance for YHOO is $37.  So if you buy at $39, be prepared to lose two dollars a share from your basis.  (It is crucial to have a plan before you buy!)



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