Fair-weather investors aren't big fans of Yahoo! because CEO Marissa Mayer is using the company's $8 billion-plus war chest to try to increase long-term value and share appreciation. I continue to subscribe to the Yahoo! bull thesis and wrote two attractive investment strategies that you can use in Real Money Pro with Yahoo!.
Yelp shares gapped higher on Monday and faded lower most of the day. It was your classic buy the rumor and sell the news event.
Considering Yahoo!'s market share in search, it shouldn't be a surprise. You will want to take note of the opening price. The open is the same as the high of the day. In the future, when you see a well performing stock gap higher on so-so news and it doesn't trade even one tick above the open, you may want to consider shorting it if you're an active intraday trader. For everyone else, it's a time to take some money off the table and maybe reload a day or two later.
Yahoo! also "gapped and crapped," but buyers came in and held a reasonable amount of support. There's no reason why they didn't and no reason not to take a closer look at Yahoo! for your portfolio.
After removing cash and investments, Yahoo! is dirt cheap in my opinion, and by just about any metric you can think of. It doesn't take long to reach a conclusion that right now, you can buy the company's earnings more or less for free. You just don't see many growing and profitable companies with an earnings multiple of about three. Yahoo! is one, and I frankly don't know of another.
Yahoo! owns about 24% of Chinese Internet company Alibaba, which is expected to have an IPO this year. The best and most recent estimations place Alibaba's valuation about $150 billion, or $36 billion for Yahoo!. If we discount for transaction costs and taxes, Yahoo! should be able to walk away from its Alibaba investment with $25 billion or more. Yahoo! may or may not sell its entire stake, but regardless, the valuation remains.
Yahoo! also owns 35% of Yahoo! Japan. One would think Yahoo! Japan is entirely owned and operated by Yahoo!, but that's not the case. The excellent news is the 35% is worth about $9 billion.
There is considerable debate over the Yahoo! Japan valuation, especially between Yahoo! and Yahoo! Japan. If we discount the net valuation expected valuation to Yahoo! shareholders, we can add $6 billion more.
Adding Alibaba and Yahoo! Japan holdings brings us up to at least $31 billion. Add $2 billion in excess cash, and Yahoo!'s $39 billion market cap begins to appear closer to $6 billion -- or less.
When viewed from that angle, the forward estimated earnings multiple shifts from 21 toward 3.3, making Yahoo!'s stock remarkably cheap. Yahoo!'s board is also convinced the shares are trading at an extremely attractive price and continues to authorize massive share buybacks.
Normally, I'm not impressed when a company's board authorizes large share repurchases. Management teams seem to get it wrong and buy at the top more often than not, and the vast majority of companies, especially tech companies shouldn't try to play the asset manager role and stick to what they know best. In other words, unless your business card says 'fund manager," don't try to invest like one.
Another red flag with share repurchases is that despite sometimes gargantuan salaries, management can't find an alternative use for working capital. The exception is when shares are incredibly undervalued to the point that management rightfully fears looking incompetent for not buying. That is where I place Yahoo!'s stock. It's so cheap that few other investments can match the return.
Where else can you buy as much as you want for only three to four times forward earnings? Nowhere else, and that is why Yahoo! is quickly moving higher toward $40 once again. You have a chance to buy at a discount, albeit don't expect it to remain available for long.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.