May 3rd, 2011

Yahoo! Jump or Dump

How much of the “fundamental” analysis offered by Wall Street is actually rationalization for having the positions they already own and how much of what we hear is merely story telling, a sales pitch, fabrication about something they hope will eventually turn out to be a reality. So much of what we see and hear is little more than predictions or, more correctly, wishful thinking?

I happened to be listening to a discussion between several Wall Street analysts on CNBC yesterday about the prospects for YHOO, the stock. The discussion was precipitate by news that a hedge fund had taken a large position in the stock in the hopes that the company can realize rewards from their Chinese assets, not about their traditional position as a search engine and, perhaps its origins as an “web portal target=”new”” (remember that nomenclature from the 1990’s?).

By virtue of the evolution of new technology, Yahoo has been searching for a strategy. Today, I have an app on my iPad, Zite, that aggregates articles (they call it a “personalized magazine) from a nearly unlimited supply of websites a range of categories of my choosing. I selected, because of my interest of course: Business & Economics, Personal Investing, Economics, Finance, Stocks, Trading and Science News. I could just as easily have selected Architecture, Wine & Mixology, Health & Exercise or any other terms that encapsulates my interests. While Yahoo continued trying to be “the” portal website, the true portal migrated to the platform.

In the meanwhile, the stock has languished:

From a high of 95 at the height of the Tech Bubble in 2000, the stock crashed to less than $5 in 2001. I has labored over the past 10 years to 18-20. Over the past several years, YHOO has formed what some might view as an ascending triangle with the neckline in the 18-20 area, right where it is today. This is where the fabrication and justification come in

According to TechTrader Daily column in Barons:

“Shares of Yahoo! (YHOO) are up 42 cents, or 2.4%, at $18.12 after reports circulated that Greenlight Capital, the hedge fund run by noted investor David Einhorn, took a position in the stock at $16.93 in Q1……the position came amidst a 2.5% drop in Greenlight’s total return in the quarter. The firm apparently is banking on the value of Yahoo!’s stake in Asian e-commerce venture Alibaba Group.”

A well researched story in Forbes by Eric Jackson says:

“….Yahoo!’s 40% stake in private Chinese companies Taobao.com and Alipay were worth at least another $14 a share currently given their torrid growth and the public comparables of other Chinese companies such as Baidu (BIDU), Sina (SINA), Dangdang (DANG), and Youku (YOKU). That brings the total intrinsic value [including Alibaba] for Yahoo! up to $31 a share. Yesterday, David Einhorn released his Q1 letter to partners in his Greenlight funds. In it, he disclosed his new long position in Yahoo! I welcome Einhorn’s position, as it will further inspire other investors to examine the private Chinese assets…..Few “facts” exist in the public universe in North America about Taobao and Alipay because these are private companies. This is probably a big reason why investors over here have a hard time giving Yahoo!’s shares the price they’re due….Tabai – owned by Alibaba Group – is basically a combination of the Amazon (AMZN) and eBay (EBAY) of China.

The Yahoo story continues to be spun further afield on Wall Street. You know my loathing of Wall Street stock “ratings”. In their ratings announcement, PiperJaffray reiterates:

“….. its Overweight rating on Yahoo! “Shares of Yahoo! currently trade at 3.5x FY12E EBITDA when factoring in the company’s Asian investments and cash. We believe a potential catalyst for shares in the next six months could be a spin-out of Yahoo!’s stake in Yahoo! Japan…..daily Ad checks in April appeared weak, and the “Display Industry Appear[s] to have essentially unchanged sell-through.” PiperJaffray holds at $22 price target on the stock.”

Other Wall Street firms added to the “fabrication” and “rationalization” by spinning out their “ratings announcements” (from American Banking and Marketing News):

  • RBC Capital analysts raised their price target on shares of Yahoo! Inc. from $20.00 to $22.00. They now have an “outperform” rating on the stock.
  • Deutsche Bank analysts raised their price target on shares of Yahoo! Inc. from $14.00 to $16.00. They now have a “hold” rating on the stock.
  • Goldman Sachs analysts raised their price target on shares of Yahoo! Inc. to $19.00. They now have a “neutral” rating on the stock.
  • Zacks Investment Research analysts reiterated a “neutral” rating on shares of Yahoo! Inc.. They now have a $18.00 price target on the stock.

So what should the individual investor do? Is Wall Street pumping up the stock to sell it to you or are they allowing you to get on-board ahead of the maddening crowd? Zooming in for a closer look of the above chart indicates perhaps a strategy:

Several times since 2009, YHOO rose to the 18-20 area and failed even as the market surged and regained much of the ground lost. Each time, as YHOO approached 18-20, the buying dried up or the selling eased up – or a combination of both. But it seems Wall Street is now trying to sell a story that this time it will be different. Should you jump or dump?

It’s not that I don’t trust Wall Street (which I don’t) but, referring back to my post “Compelling Examples for Buying on Breakouts“, I for one would wait to see whether YHOO successfully crosses above that neckline this time. I don’t want to risk buying shares from large institutional holders only to learn latter that Yahoo’s opportunities or execution in China weren’t truly as great as they were made out to look. The opportunities may turn into reality, the stock poll-vaults above the neckline and it costs me several points or I miss out on the whole opportunity all together. Alternatively, YHOO could again fail to cross but this time drops to new lows. It’s my money and I’d rather be safe than sorry.

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