MorningWord 1/29/13: Last night YHOO reported it’s first anual revenue increase (up 2%) since 2008, not particularly a huge accomplishment considering that sales have been stuck btwn $4.38 billion and $4.48 billion for the last 4 years, a period where GOOG has been growing sales on avg about 25% a year. YHOO investors appear to be resigned to the fact that the company’s core search and ad display businesses are in a decline losing share to both the dominant players, and the upstarts. YHOO’s board may have finally hit CEO gold with their choice of Marissa Mayer from YHOO this past summer, as she marks the 7 person since 2007 to hold the post, she is very likely the best suited person to turn the ship around. With little to show for her short tenure, investors have bid YHOO shares up 30% since she agreed to take the spot, with little knowledge of her plans to return the beleaguered web property to its past internet glory.
Make no mistake about it, she has an uphill battle when it comes to the core business that is incessantly under attack from the likes of GOOG, FB and Twitter, and now facing similar platform challenges in their effort to remain relevant on an increasingly mobile online world as they attempt to monetize users on a 4 to 8 inch screen. The good news is, YHOO investors don’t have high expectations for a quick fix, and they appear to be more focussed on the sum of the parts that make up the value of YHOO’s equity than the next mobile widget or content partnership. With a market capitalization of $24 billion, the company has 1/4 of that in cash on their balance sheet and no debt. In Q4 2012, YHOO bought back 80 million shares of their 1,054,000,000 share float, or approximately 7.5% and investors want more and possibly even a dividend. On top of some good ol fashioned financial engineering, YHOO’s stakes in China’s b2b powerhouse Alibaba, and their stake in YHOO Japan are worth almost $10 a share, which ex their cash at $5 a share leaves investors paying little for their expected $1.12 in earnings in 2013. But here is the rub, this was the same bullish thesis being made when the stock was $17, $18, $19 & now above $20. At some point management will need to show some a path towards organic revenue growth through innovation. If all of this seems like a lost cause in front of the watchful eye of Wall Street, maybe they use the proceeds of Alibaba once monetized and go the way of Michael Dell and take this baby private.
From a purely technical standpoint, the 5 year channel the stock has been stuck in appears to be ready to make a new range, but one thing is for certain, selloffs will likely be met with buyers for the for-seeable future. From a purely visual perspective, at the low end of the highlighted range, and barring a material change to the values of their holdings, YHOO’s core business is basically valued at NOTHING.
Despite the investor euphoria with the stock, Wall Street analysts remain a bit more skeptical, as the company is rated with 7 Buys, 27 Holds and 1 Sell with an average 12 month price target of $20.27 (right where the stock closed yesterday). And regardless of analysts’ wait and see approach, Mayer and her new management are likely to maintain their honeymoon status with investors probably for at least one quarter after her first analyst/investor meeting that could be held in May/June time period as it had been under past CEOs. I will be a buyer on broad market weakness, as I see little fundamental for the time being that should affect investor sentiment in the face of the impending Alibaba ipo in China. I am not a buyer here, but on a healthy pullback to $18 or so could be a great entry point.
MorningWord 1/28/13: The SPX’s close above 1500 Friday, a new 5 year closing high, is fairly remarkable when you consider that one of its largest components, AAPL, over the last few years made a new 52 week low, and ceded its title as the largest market cap company in the world back to XOM. The ability of equities both large and small to rally to new highs, without one of its biggest horses, is fairly remarkable when you consider just how narrow the broad market rally had been in 2011/2012. To help make this point, at one point AAPL made up almost 5% of the S&P 500 last year when the stock was up 75% back in Sept, now with AAPL down 38% from the highs, the stock is the 2nd largest weighted stock in the index at ~3%, and the SPX is up 2.7% from the Sept levels. The rally has broadened out, and this is obviously bullish for equities.
The top 20 stocks in the SPX make up about 30% of its weight, and aside from AAPL, none of the other 19 stocks are trading at or within 10% of their 52 week lows, but there are a few very noticeable laggards, WMT,KO, T, MRK, MO, MSFT and VZ, that just can’t rally. There are a couple things in common among these stocks, all either offer healthy dividend yields or they were perceived “safety trades” given their defensive nature throughout the European turmoil of the last 2 years. The one year chart below shows the out-performance of WMT, KO & T to the SPX for most of 2012, right up till the mid Nov lows, and then, BOOM.[caption id="attachment_22018" align="aligncenter" width="490"] 1 YR SPX vs WMT, KO & T from Bloomberg[/caption]
I guess there is a couple ways of looking at this, for every one of these mega-caps that is under-performing there is one that is near or making new highs, WMT/COST, KO/PEP, MRK/PFE, MO/PG, MSFT/ORCL…you get the point. Bulls would argue this is a natural rotation, and if we have just entered a secular bull market, than ultimately these under-performers will add some fuel to keep the firing going at a later date as the rally continues to broaden out.
In the short-term, we’re watching price action in the vol market quite closely. As long as protection stays so cheap, investors will have little incentive to sell their stocks, and will prefer to just stay long, and buy cheap puts instead. If options start to get more expensive, we think you might see some stock selling as people lighten up positions as opposed to buying protection.