Yahoo! Inc. (YHOO), McGraw Hill Financial Inc (MHFI): Passport Doesn’t Pass Up an Opportunity

Passport Capital is a San Francisco-based global investment firm founded by John Burbank in 2000. Passport takes a strategy that focuses on major global themes, driven by macroeconomic analysis and fundamental research. Outlined below are a few stocks that Passport was buying up during the first quarter (check out Passport’s portfolio).

The hedge fund was not passing up any opportunities during the first quarter; the fund added a number of notable companies to its portfolio, including McGraw Hill Financial Inc (NYSE:MHFI), Yahoo! Inc. (NASDAQ:YHOO) and Yelp Inc (NYSE:YELP).

McGraw is now Passport’s eighth-largest holding and makes up 2.8% of its portfolio. McGraw has been undertaking various initiatives, including focusing on higher-growth businesses, which involves the recent classification of its education segment as “discontinued operations.”

However, the market for credit rating, research, investment and advisory services is highly competitive, with Moody’s Corporation (NYSE:MCO) being a top competitor. Also, the stock has overhang from a civil lawsuit with the DOJ. McGraw Hill Financial Inc (NYSE:MHFI) is also a bit “rich” from a valuation perspective, trading at 13 times earnings, versus its five-year trading range of 7.4 times to 16.9 times.

The one positive is that McGraw has been impressive when it comes to creating shareholder value. During 2011 and 2012, McGraw Hill Financial Inc (NYSE:MHFI) repurchased some $1.8 billion worth of shares and distributed approximately $600 million in dividends, while also distributing $700 million of special dividends in December 2012. McGraw now pays a 2% dividend yield.

McGraw Hill Financial Inc (NYSE:MHFI) saw rising hedge fund interest going into 2013, with 31 hedge funds long the stock, an 11% increase from the previous quarter. Activist Jana Partners was the top hedge fund owner with a $118 million position that made up 3.3% of its 13F portfolio (see Jana’s top picks).

Yahoo! Inc. (NASDAQ:YHOO), another new addition of Passport, is seeing its search business continue to show signs of improvement, as well as growth in its display segment. However, Yahoo! continues to be displeased by the performance of its Microsoft Corporation (NASDAQ:MSFT) Bing search partnership. The partnership has been in place since 2010, and I don’t see any other viable options for Yahoo! in the search game. Thus, if Yahoo! does find a way to end its Microsoft Corporation (NASDAQ:MSFT) partnership, I would be cautious about the stock.

One of Yahoo! Inc. (NASDAQ:YHOO)’s big initiatives is in the mobile segment. Yahoo! doesn’t have any material mobile-advertising revenue yet and is far behind its competitors Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). However, Yahoo! redesigned its mobile-search page across 23 countries, resulting in increased usage last year. ComScore expects mobile to grow very rapidly, surpassing desktop users in 2014.

Analysts expect Yahoo! Inc. (NASDAQ:YHOO) to grow EPS nicely in 2013, despite a slight down tick in revenue. This puts the tech company’s forward P/E at 18.6, which is just above Google Inc (NASDAQ:GOOG)’s 17 times forward P/E.

Other new Passport pick, Yelp Inc (NYSE:YELP), remains unprofitable and trades at a high 12.5 times sales. Meanwhile, other notable recent IPOs Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA) trade well below this, at 1.9 times sales and 2.5 times, respectively. Part of this “overvaluation” is the over-hype related to Yelp’s mobile app and international opportunities.

However, the problems here are that many Internet advertisers are finding it hard to monetize mobile apps; take Facebook Inc (NASDAQ:FB) for example. Meanwhile, the idea that international growth will drive revenue higher is somewhat of a pipe dream considering that its current revenue growth is being coupled with faster growing expenses (see why Passport loves Yelp).