Special Situations: Yahoo (YHOO US)
It only took one week…
YHOO US: US$ 40.80
September 29, 2014
It only took one week to see a Yahoo shareholder becoming a vocal activist. While we disagree with Starboard Value’s idea (get Yahoo to buy AOL to achieve synergies), it just highlights the value in the stock and we re-iterate our buy recommendation on Yahoo. Moreover, we note that Alibaba can be shorted (stock borrowing costs around 8-10%) and that options started to trade today. It is therefore possible to hedge the stake in Alibaba (about 1 baba for 2 yhoo). One alternative recommended strategy would be to go long Yahoo and sell out of the money calls on Alibaba. For example Dec 100 calls can be sold for around $3.00 as of this writing. In other words, one could essentially collect the call premium, and only be effectively short BABA from 103 upward, or 15% higher than now. However, if Yahoo’s discount was to remain constant at the current level of 30-32%, the shares would need to rise to $44 or 7.5%. This does not take into account the fact that we believe that Yahoo’s discount should contract south of 20%.
FULL REPORT ATTACHED