Yahoo! Inc. (NASDAQ:YHOO) wants to make bread by giving away bread. However, will the strategy work and give Yahoo a much needed new revenue stream? The struggling Internet veteran has launched Yahoo Sports Daily Fantasy service – the newest twist in the multi-billion dollar fantasy sports market – through which people have the chance to win money daily and weekly. Described by Yahoo as “taking the game to the next level,” the service builds upon the firm’s current industry-leading fantasy sports platform, where people can participate in daily fantasy sports games where they compete with others for prestige but never, until now, for cash. With the launch, the Internet firm says it “becomes the first major sports site and the only technology company of its scale to offer its own Daily Fantasy experience,” and investors likely feel it’s about time Yahoo sought to capitalize on its fantasy sports pedigree when it comes to the burgeoning daily fantasy sports market, which has quickly ballooned in to a multi-billion industry currently dominated by FanDuel and DraftKings.
Will this new Yahoo! Inc. (NASDAQ:YHOO) service give some redemption to Chief Executive Marissa Mayer, oft-criticized as she is for not making the right moves and acquisitions to spur growth at the tech giant? For now, that remains to be seen, but it should be noted that hedge funds tracked by Insider Monkey showed increased interest in Yahoo by the end of the first quarter of the year. At the end of that period, a total of 104 of the hedge funds tracked by Insider Monkey were bullish in this stock, up 5% from the close of the fourth quarter of 2014. There was a slight decrease in hedge funds’ total holdings, however, as the total value slide by 14.63% to $6.48 billion by March 31, from $7.59 billion the prior quarter, though the stock also slumped by 12.03% from January through March.
A quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
Insider Monkey also tracks insider moves in companies such as Yahoo to see whether executives inside these companies are confident in these firms’ shares. Director H. Lee Scott, Jr. bought 15,000 shares of Yahoo on February 2. However, CEO Mayer sold a total of 300,000 shares in transactions on April 9 and 16.
Keeping this in mind, we’re going to go over the new action encompassing Yahoo! Inc.
What have hedge funds been doing with Yahoo! Inc. (NASDAQ:YHOO)?
According to hedge fund experts at Insider Monkey, Daniel S. Och‘s OZ Management had the most valuable position in Yahoo! Inc. (NASDAQ:YHOO), worth close to $650.9 million held in about 14.65 million shares, corresponding to 2.1% of its total 13F portfolio. On OZ Management’s heels is D.E. Shaw & Co., L.P., managed by David E. Shaw, which held 12.43 million shares at the end of the first quarter, a $552.5 million position. Some other members of the smart money with similar optimism comprise Christian Leone’s Luxor Capital Group, Jeffrey Altman’s Owl Creek Asset Management, and Jeffrey Smith’s Starboard Value LP.
As aggregate interest increased, key hedge funds were leading the bulls’ herd. Hudson Bay Capital Management, managed by Sander Gerber, created the biggest position in Yahoo! Inc. (NASDAQ:YHOO) during the first quarter. Hudson Bay Capital Management had $144.5 million invested in the company at the end of the quarter, buying 3.25 million shares. Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors also made a $50 million investment in the stock during the quarter, buying 1.13 million shares. Other funds with new positions in the stock included Thomas E. Claugus’ GMT Capital, Peter S. Park’s Park West Asset Management, and Ryan Pedlow’s Two Creeks Capital Management.
While this move will likely be underestimated by the market, we believe it has the potential to add a notable revenue stream to Yahoo’s books and that the company is in a strong existing position in the fantasy sports market to be able to steal a good deal of market share from the current players in daily fantasy sports gaming. With Yahoo’s core business still trading at close to zero value, and increased interest from the smart money in the stock, we believe Yahoo is a great buying opportunity for the long-term, though one that will continue to be greatly affected short-term by swings in Alibaba Group Holding Ltd (NYSE:BABA)’s shares.
Disclosure: None
