Will Yahoo! Continue to Explode to the Upside?

With shares of Yahoo! (NASDAQ:YHOO) trading around $31, is YHOO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Yahoo is a technology company that provides search, content, and communication tools on the web and on mobile devices worldwide. It operates Yahoo.com, which offers Yahoo! Search, Yahoo! News, Yahoo! Sports, Yahoo! Finance, Yahoo! Entertainment and Lifestyles, and Yahoo! Video. Being such a large content provider, Yahoo is able to reach a significant amount of consumers across the globe. As the internet attracts an increasing number of participants, look for Yahoo to continue to be a major player.

Yahoo CEO Marissa Mayer has reported a number of significant victories since her appointment to the position more than a year ago, among them Yahoo’s stock rally, its $1 billion acquisition of Tumblr, and the site’s appealing homepage and email redesign.

While Yahoo once looked as if it could be at the end of its road, quickly losing more and more ground to Google (NASDAQ:GOOG), the Sunnyvale, California-based corporation has since convinced consumers and analysts that it may be down, but it’s not out. It’s orchestrating several facelifts, embarking on plans with Apple (NASDAQ:AAPL) that make it more mobile friendly, and partnering with high-profile celebrities to beef up the company’s media offerings.

T = Technicals on the Stock Chart Are Strong

Yahoo stock has been on a strong bull run higher in the last several quarters. The stock is currently trading near highs for the year and looks ready to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Yahoo is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

YHOO

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Yahoo! options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Yahoo! Options

36.25%

80%

79%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Yahoo’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Yahoo look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

66.67%

52.17%

-2.15%

1048.00%

Revenue Growth (Y-O-Y)

-6.78%

-6.62%

1.64%

-1.23%

Earnings Reaction

10.34%

-0.37%

-3.00%

5.70%

Yahoo has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Yahoo’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Yahoo stock done relative to its peers, Google (NASDAQ:GOOG), AOL (NYSE:AOL), Microsoft (NASDAQ:MSFT), and sector?

Yahoo!

Google

AOL

Microsoft

Sector

Year-to-Date Return

56.58%

25.64%

18.88%

21.34%

23.28%

Yahoo has been a relative performance leader, year-to-date.

Conclusion

Yahoo is an Internet bellwether that provides a multitude of services to consumers and companies worldwide. The company continues to benefit from Marissa Mayer’s innovation that has propelled the stock much higher. In fact, it is currently trading near highs for the year and looks ready to continue. Over the last four quarters, earnings have been increasing while revenues have been mixed which has produced conflicting feelings among investors. Relative to its peers and sector, Yahoo has been a year-to-date performance leader. Look for Yahoo to continue to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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