Whether Yahoo! Inc. (NASDAQ:YHOO) is a good stock to buy right now or not can be determined by a number of factors. A few of these include investor activity in the stock and the activity of the company’s management insofar as it influences the stock’s performance, providing a potential basis for investor decisions. While looking at general investor activity is equally important, we put more emphasis on institutional investors, since they have more robust and tested investment strategies implemented and an exceptional understanding of the stock market. Insider Monkey’s internal analysis reveals that several top institutional holders of Yahoo’s stock have increased their stakes by more than 10%. The biggest shareholder, Daniel S. Och, for example, upped his portion in the stock by more than 50% during the first quarter ended March 31, 2015. Moreover, the number of hedge funds that were invested in the stock at the end of the quarter was 104 out of the 730 that we tracked, up from 99 in the previous quarter. The funds held a total of $6.48 billion in investment value at the end of the quarterly period ended March 31, 2015.
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Our argument is that most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 142% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 84 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Follow Jeff Smith's Starboard Value LP
There are several issues surrounding Yahoo! Inc. (NASDAQ:YHOO) that have made it one of the most popular stocks among hedge funds. Starboard Value for one, has been a key driver of the stock’s momentum at times. The activist fund’s pressure on Yahoo to increase shareholder value combined with its initially bullish entrance into the stock coincided with strong gains. Starboard Value owned 6.82 million shares of the company at the end of the first quarter of 2015, with a market value of $303.24 million. The fund purchased the stock in the third quarter of 2014, closing the quarterly period with 7.72 million shares, showing great confidence in the stock. This came just before Alibaba Group Holding Ltd (NYSE:BABA)‘s initial public offering, which generated a record $25 billion and earned Yahoo! Inc up to $9.4 billion. Jeffrey Smith, the owner of Starboard Value, has put the online tech company’s management team on its toes just like he successfully did with Darden Restaurants, Inc. (NYSE:DRI) and Staples, Inc. (NASDAQ:SPLS). The activist investor wants Yahoo! Inc. to spin off Yahoo! Japan, go for more share buybacks, and initially wanted Yahoo to pursue a merger with AOL, a demand which he later shelved (AOL was purchased by Verizon Communications Inc. (NYSE:VZ) earlier this year).
As such news surfaces, a lot of things happen in the stock market. For example, the announcement of the spin-off of Yahoo! Inc’s stake in Alibaba has led to a 9.2% slump in Yahoo! Inc. shares over the last 30 days as investors worry over whether or not there will be any value left in an Alibaba-less Yahoo. While this might be a bad development in the short term, the spin-off has great potential in the long term. CEO Marissa Mayer has reiterated that her company is proceeding with the Alibaba spin-off as planned and that the activity will not be affected by any potential regulatory hurdles, saying that any newly introduced tax steps do not apply to spin-off requests made prior to the new rules being implemented. This dispels initially held fears that the new tax rules might affect the spin-off process.
Mayer has been working around the clock to give the company she heads a jumpstart. Yahoo! Inc has been facing stifling competition from other tech giants like Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB). The idea of upping stakes in different stocks, rolling out spinoffs, and forging partnerships (like its recently inked deal with the National Football League which will see it broadcast an NFL game online) are some of the steps that Yahoo! Inc is taking to boost its performance and image. The company already entered into a partnership with Firefox to have the Mozilla Firefox browser optimized for its search service.
Yahoo! Inc. has also made several acquisitions to diversify its revenue base and improve its services. Some of the notable acquisitions that have shown great potential include Tumblr, Flurry, and Brightroll. Tumblr, for example, is a microblogging system that has realized strong growth over the past few years, reaching more than 400 million registered accounts. Mayer is confident that by the end of 2015, Tumblr will reach EBITDA profitability and that the unit will generate up to $100 million in revenue. The CEO’s acquisition spree has been fueled by pressure to redefine its image. The fact that there is money to fund such acquisitions presents an invaluable opportunity for the company to set a stage for healthier competition against its rivals. However, Smith insists that the acquisitions should leave out startups that will not add revenue to the company.
Among analysts, the stock is doing pretty well. Up to 27 analysts have given the stock a “Buy” rating with an average broker rating of 1.76 (between a “Strong Buy” and “Buy” consensus average rating). The company posted $0.15 in earnings per share in its most recent earnings report, missing analysts’ consensus estimate of $0.18. The stock has been given average earnings per share target of $0.77 for the current fiscal year. In conclusion, there are several reasons that make Yahoo! Inc. (NASDAQ:YHOO) a good stock to buy now. We believe a long position in YHOO hedged with a short position in BABA will probably generate positive returns.
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