MorningWord 7/18/13: Often times in our event previews of a single stock names you will see us write things like “a beat and raise is IN the stock at these levels”, which suggests that we think investors have adequately “priced in” the potential positive outcome of the event given the stocks current price. Readers of our previews are familiar with the inputs that we use to arrive at such statements, and I think it is safe to say that they are not just qualitative judgements.
As we head into the meat of earnings season, I would suggest that the psychology surrounding most stocks can be just as important as the actual results and/or guidance that a company gives. Lets use YHOO for an example, prior to Tuesday’s Q2 results, the stock was up almost 40% on the year, having little do with the actual results expected by analysts or investors. On Monday I concluded my Q2 preview of the stock (here), by suggesting:
There appears to be no shortage of potential positive catalysts for YHOO shares, from the prospect of Marisa Mayer turning around YHOO’s core business, to the value of their Asian assets being monetized for more than analysts expect. It doesn’t change the fact that her 5 CEO predecessors have failed at the very same task that is before here. Make no mistake about it, there is a lot of good news in the stock, but the jury is still out on whether or not she is in the early stages of what would amount to one of the most dramatic turnarounds for a tech company in the post dot-com bubble era.
Despite the sum of the parts valuation getting stretched in the high 20s, likely remains a stock that will be and should be bought on dips as the core business’s troubles are fairly well known at this point. As we get closer to Mayer’s second anniversary on the job, and the Alibaba stake is absorbed, investors will likely once again focus on YHOO U.S. In the meantime, it appears that the buy the dip crowd will rule the day.
The postmortem on YHOO’s Q2 results are fairly interesting in my opinion when you consider the stocks 10% surge post the results that were highlighted by a Q2 revenue miss (albeit a modest one ~1%) and a guide down for the balance of 2013 in both revenues and earnings. As EXPECTED, YHOO’s core business continues to be challenged, but monster earnings contribution from their investment in Alibaba overshadowed such weakness and continues to dictate the story. Investors have made up their minds that CEO Mayer is going to have the time she needs to implement her proposed turnaround which includes her recent Acqui-Hire strategy and what will eventually look like the “Googlification” of a web brand that was nearly left for dead last year.
Now with the stock at 5 1/2 year highs, approaching levels not seen this MSFT’s $30 plus bid for the company back in 2008, and basically a double since Mayer took over, the obvious question is what is IN the stock at current levels?? The 6 year chart below shows the stocks amazing slumber since the financial crisis and its very recent re-awakening, which from a purely technical standpoint, $30 should serve as meaningful resistance.
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YHOO 6 yr chart from Bloomberg[/caption]
Later this year CEO Mayer will hopefully hold and analyst meeting which should give her the opportunity to better lay out her turnaround plan which could layout a plan for earnings and sales re-acceleration in their core business (ex Asian holdings).
Yesterday’s break-out (below) was fairly epic both on volume and ferocity, it felt like the stock would continue to go up as long as the market remained open. Regardless of fundamentals, the technical set up, and psychology surrounding the story suggests that this stock be bought on a pullback to the breakout level. The stock will likely need to build some steam to get through the highs from 2008, as investors who have held since then likely have remaining brain-damage from the bonehead founder’s dismissal of the MSFT bid and the stock could find sellers at those levels…..So a healthy consolidation between $28 and $30 could do just the trick to set the stage for higher highs.
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YHOO 1 yr chart from Bloomberg[/caption]