Trade Update 2: YHOO: Managing Feb/Apr Time Spread

by CC February 7, 2012 11:28 am • Commentary

Trade Update 2: Feb 7th, 2012

With YHOO at 15.84 we’re going to cover the Feb 17c at .05c and look to turn the April call into a Call Spread in the near future, hopefully on a rally in the stock. The Feb call will most likely expire worthless but it’s not worth hanging around to squeeze that last 5 cents out of the trade as anything can happen in the next week.

As it stands now, the April 17s are worth about 50c, so the sale of the Feb calls have covered any loss in those. This trade now sets up fairly well. Currently the April 19 calls are about 11 or 12 cents. We will look to sell these if they get a little more meat on them and be left with a call spread in April.


Trade Update 1: Jan 25th, 2012

Last night YHOO reported slightly disappointing revenues for Q4 and guided below the street consensus for Q1.  This didn’t really come as surprise to most as YHOO continues to face a strain on time spent on its network from the likes of Facebook and it’s Display Advertising business continues to lose share to GOOG.   But the truth is investors will give a “pass” to the new CEO on it’s core business, and the reason the stock is not down much more than the 1.25% this morning is that Investors are waiting for some news or action on the previously discussed sale of YHOO’s Asian assets.

All of the above are the reasons why I wanted to fade a near term move into earnings and set up for some upside as we head into the spring.

Yesterday I bought the YHOO Feb/Apr 17 call spread for .45 when the stock was $15.67.  Now with the stock at $15.55 the call spread is worth about .39.  The Feb 17 calls that I sold at .15 can now be bought back for .11, and the Apr 17 calls that I bought for .60 are now worth .50.

SO what to do now, I am going to hold on for a bit and look to cover the Feb17s when they are offered at about a nickel, and then look to turn the Apr 17 calls into a call spread by selling a higher strike call against them.  Stay tuned.


Original Post Jan 24th, 2012: 

Event: YHOO ($15.67) report Q4 after the close tonight

-Options market is implying about a 4% move vs the 4 qtr average move of about 4.5%

Consensus Expectations:

Q4: .24 eps, $1.19b in sales

Q1: .20 eps, $1.08b in sales

2012: .91 eps, $4.547 in sales

-YHOO will be hosting their first earnings call since the appointment of new CEO Scott Thompson.  It is just common sense that after just a few weeks on the job, Thompson will not go out on a limb and give overly aggressive guidance as he sets his sites on succeeding in a post that has seen very few  do so over the last decade.

-GOOG’s earnings disappointment late last week doesn’t exactly raise the bar for YHOO’s  Q4.

Sentiment: Wall Street analysts are fairly mixed on the name with 10 Buys, 20 Holds and 1 Sell and avg 12 month price target of about $17.82.  Short interest is about 3.25% of the float.

Balance Sheet and Valaution: 

-YHOO has about $2.8b in cash and no debt, about $2.25 a share.

-I guess the real reason many bulls suggest owning YHOO shares is that the sum of the parts, including $2.25 in cash per share and estimates of Alibaba  and YHOO Japan worth about $11-$14 (per BofA note to clients Jan 20th) leaves the value for YHOO’s core business at just $5.00 a share.

-BofA analyst Justin Post sees valuation at current levels reasonable give the potential for a sale of their Asian assets, in a not to clients Jan 20th:

We believe the underlying trends at Yahoo (share losses) remain weak, but the
core business represents just 20% of the stock value and the stock will continue
to trade on deal speculation. Our $18 PO is based on $13 in asset value and low
4x multiple to 2012E EBITDA (to reflect display/search uncertainties). We see a
potential Asian asset sale as the most positive likely case for the stock, and don’t
see huge downside despite a struggling core business given $13+ in asset value.


Technicals and Price Action:

-Stock has flat-lined btwn ~$15 and $16.25 for the last couple months that have included management changes and lots of chatter about strategic asset sales.

-Stock continues to straddle the 200 day moving average and is making a decent looking base that could be a launching pad on the news of a tax effective asset sale.  The stock is mildly in the doghouse so far this year down about 2.8% vs the Nasdaq that is up almost 7%.


[caption id="attachment_8235" align="aligncenter" width="300" caption="1 YR YHOO chart from Bloomberg LP"][/caption]



MY TAKE:  while expectations aren’t exactly running high heading into the print, my sense that fading an upside move in the near-term and setting up for a rally into the spring, as the new CEO gets his arms around the business and prepared to make a decision on Alibaba/YHOO Japan.  This could take a couple months, and the truth is If I were Thompson I would want to get the deal done relatively soon, get investors off my back and look to better position a well capitalized, leaner more focused company (that faces significant competition from GOOG and Facebook to name a few) for the next 10 years.


YHOO ($15.67) Bought Feb / Apr 17 Call Spread for .45

-Sold 1 Feb 17 Call at .15

-Bought 1 Apr 17 Call for .60

Break-Even on Feb Expiration:

-If the stock is below $17, the Feb 17s that I am short will expire worthless, and then I essentially own the Apr 17 calls for .45

-Max loss is .45 if the stock is meaningfully above $17, but the likelihood of being down much on an initial pop in the stock is not great.

Trade Rationale:  I want to look to buy some upside exposure in anticipation that a deal to sell YHOO”s Asian assets gets announced in the next couple months.  I think it would be almost impossible for the new CEO to do this in the next few weeks as he has only been on the job for a couple of weeks.

I also think there is a good chance that the new CEO kitchen sinks Q1 and possibly 2012 as he sets himself up to have a string of beat and raise quarters out of the gate.  If I were him I would do what previous CEO Carol Bartz did when she took over a few years back and blame everything on the previous management and start anew.

The only reason you want to own YHOO Is that you think the core business is vastly under-appreciated and that once that can be valued as a standalone that investors will better appreciate them or possibly a strategic buyer.

I am selling Feb options as I think that lack of clarity in the near term could keep the stock in the trading range that it has been in.