John Burbank’s Passport Capital Is Another Yelp Bull

Passport Capital, a hedge fund managed by John Burbank, has reported a position of 1.1 million shares in Yelp Inc (NYSE:YELP), which makes for 6.3% of the outstanding shares of the business reviews website. Our database of 13F filings shows that the fund had not owned any shares at the end of the third quarter of 2012. Earlier this year we looked at Passport’s investment philosophy and process. Learn more about how Burbank and his team invest and see what stocks it did own at the end of September. We track hedge fund filings to stay up to date on what these investors are doing, as well as to help us develop investment strategies; the most popular small cap picks among hedge funds, listed in our August newsletter, outperformed the market by 18 percentage points between September and January (read more about our hedge fund strategies).

Yelp Inc has become something of a battleground stock. On the one hand, we’ve reported on several hedge funds taking significant stakes in the company; just two weeks ago, Robert Karr’s Joho Capital reported that it had increased its own holdings to almost 6% of the outstanding shares. Read more about Joho buying Yelp. Steadfast Capital Management has also been a major shareholder in the company. On the other hand, over 60% of the outstanding shares are held short and we would note that our records of insider trades include a number of insider sales in the past few months, including three different insiders selling over $100,000 in stock in January 2013 (see a history of insider sales at Yelp). Insider sales generally aren’t as informative as insider purchases as selling shares can be rational, but it can be a factor to take note of.

In its most recent quarter, Yelp Inc reported a small loss- which isn’t good for a company with a market capitalization of more than $1 billion- though its revenue did increase by 63% from its levels in the third quarter of 2011. Wall Street analyst expectations are for a small profit this year, resulting in a very high current-year P/E, though as with many other websites the presumption is that at some point Yelp will develop a monetization strategy that will leave it with high earnings growth. Of course, another potential investment thesis is that Yelp would be acquired by another Internet company. Still, we don’t think that the stock is a buy right now.

Let’s look at some of the company’s peers: