May 26, 2015

Back in Yahoo shares




I am once again buying Yahoo shares based on the opportunity presented in the stock's decline on Tuesday.

With shares of YHOO and China's Alibaba trading lower and given the ambiguous nature of the IRS statement on Yahoo!'s proposed spinoff of its BABA stake, the upside-downside ratio is finally compelling.

It's important to note that even if the IRS spinout ruling is agreed to (only 33% chance, from my perch), the value of the residual Yahoo! is now slightly negative.

First, a bit of history.

I know Yahoo! well from an analytical understanding. Last year, Yahoo was made a Kass Katch in late September at about $40.

My principal focus was a "sum-of-the-parts" analysis. My main catalyst at the time was an expected tax-free exchange of Yahoo!'s BABA holdings, which was indeed announced shortly after my buy. Within four or five weeks, I sold out the stock for a near $6-a-share gain.

Yahoo!'s shares continued rising toward $52 after I sold -- until Alibaba recorded an earnings and sales miss. Then the stock came back to earth. At that time (when the shares were in the high $40s to low $50s), I debated several bulls like Eric Jackson and suggested Yahoo! should be avoided because of a lack of transparency and opaqueness at Alibaba. 

Eventually, BABA shares tanked from over $120 in November to briefly flirt with $80. But the company recently came in with a much better quarter and the shares have risen about 10% from that low point of about  $80.

Still, as mentioned, the IRS yesterday made a statement that questioned Yahoo!'s ability to spin off its BABA holdings on a tax-free basis.

To me, it's unclear if the IRS statement will affect Yahoo!'s BABA spinoff. (Again, I would arbitrarily give it a 33% possibility.) Moreover, as BABA's share price has declined from $120 to $88, this reduces the downside risk to Yahoo! stock. And so does Yahoo!'s share price drop from $44 to $41!

The bottom line: I believe the BABA spinout will occur, and that Yahoo! shares can return to the high $40s over the next three to six months. But even if the IRS statement becomes a ruling, I see some margin of safety for Yahoo! stock based on my belief that the market is putting zero value on the company's non-Asian investment assets.

Position: Long YHOO 



Originally published on May 20 
http://www.thestreet.com/story/13161960/1/kass-steers-away-from-car-rental-forays-dives-in-yahoo-and-parses-the-housing-and-manufacturing-stats.html

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