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Stock Pick of the Week: Sell/Short Yahoo (YHOO)

Tuesday, August 3rd, 2010

Yahoo is one of August’s Most Dangerous Stocks. Free copy of report: YHOO. And like all of our Most Dangerous Stocks the company has:

  1. Misleading earnings = accounting profits are positive and rising while true, economic profits are negative and falling
  2. High Valuation = very high expectations embedded in the current valuation.

Red Flags:

  1. YHOO reported a $173mm increases in GAAP earnings** while our model shows economic earnings declined by $267mm
  2. The company’s ROIC is in the Bottom Quintile of all the companies we cover.
  3. Stock price of $14.00 implies YHOO will grow its NOPAT at 15% compounded annually for 20 years. A 20-year Growth Appreciation Period with 15% compounding growth rate is quite a high standard to beat, as per my post on How To Make Money Picking Stocks.

Overall, the Risk/Reward of investing in Yahoo’s stock looks Very Dangerous to me. There is lots of downside risk given the Misleading Earnings and there is little upside reward given the already-rich expectations embedded in the stock price.

As per and , YHOO fits the profile of a great stock to buy.

**See for more detail on why accounting profits are not reliable indicators of corporate profitability or value creation.

Note: Stock pick of the week is updated every Tuesday.

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  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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