Does Yahoo Belong in Your Portfolio?

With shares of Yahoo (NASDAQ:YHOO) trading around $39, 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 has announced a partnership with Comcast Corp.’s (NASDAQ:CMCSA) NBCUniversal for rights to create digital content covering the 2014 XXII Olympic Winter Games in Sochi, Russia. The partnership involves NBC giving Yahoo access to its exclusive coverage of the Games, which will spawn a live stream of the Games and a digital Olympics daily show. Yahoo’s products will also be advertised during NBC’s digital and television coverage of the event. Yahoo Sports reporters will work alongside NBC reporters during coverage of the Games. In addition, NBC will use Yahoo products like search, Flickr, and Tumblr in promoting the event.

T = Technicals on the Stock Chart Are Strong

Yahoo stock has been exploding to the upside in the last several months. The stock is currently trading near all time highs 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

31.94%

53%

51%

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

Put IV Skew

Call IV Skew

January Options

Flat

Average

February 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 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 Mixed 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-6.67%

66.67%

52.17%

-2.15%

Revenue Growth (Y-O-Y)

0.33%

-6.78%

-6.62%

1.64%

Earnings Reaction

-0.86%

10.34%

-0.37%

-3.00%

Yahoo has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Yahoo’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

101.80%

52.57%

45.16%

36.81%

45.84%

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 has announced a partnership with Comcast Corp.’s  NBCUniversal for rights to create digital content covering the 2014 XXII Olympic Winter Games in Sochi, Russia. The stock has been moving higher in recent quarters and is now trading near all time highs. Over the last four quarters, earnings and revenues have been mixed, which has pleased investors about earnings announcements. Relative to its peers and sector, Yahoo has been a year-to-date performance leader. Look for Yahoo to OUTPERFORM.

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