Seeking Alpha
What is your profession? ×
Portfolio strategy
Profile| Send Message|
( followers)

Introduction:

This is my fourth article about stocks that seem significantly overvalued in the NASDAQ 100. You can find the previous ones in my profile. The proof of a bubble is a divergence between the price and fundamental metrics. This article is a quick evaluation of Yahoo Inc. (NASDAQ:YHOO) from this point of view. My thesis is that YHOO is overvalued relative to the NASDAQ 100 universe. I think that investors should take their profits in the next rallies. This stock has a strong annual momentum and can go higher with seasonality in the next two months.

Methodology:

I will use various metrics. They are formulas with fundamental factors and weights. The score is between 0 (the worst) and 100 (the best).

Here are the metrics:

Metrics Name

Description

Basic Growth

Balanced blend of growth ratios

Basic Value

Balanced blend of valuation ratios

Basic Quality

Blend of financial ratios, margins, returns on capital

Buffett

Inspired by Warren Buffett

Graham

// Benjamin Graham

Greenblatt

// Joel Greenblatt

Lynch

// Peter Lynch

ONeil

// William ONeil

Piotroski

// Joseph Piotroski

Zweig

// Martin Zweig

The metrics inspired by famous investors are an interpretation of publications. No claim is made that it models accurately their strategies.

The next table reports the scores of YHOO. You can read them as fundamental relative strength indicators in the NASDAQ 100 Universe.

Metrics

YHOO Scores

Basic Growth

13

Basic Value

39

Basic Quality

26

Buffett

13

Graham

34

Greenblatt

15

Lynch

78

ONeil

1

Piotroski

79

Zweig

6

Average Score: 30.4 / 100

The next three charts show the evolution of the basic scores for twelve months (in green), compared with the price (in red).

Basic Growth:

(click to enlarge)

The Basic Growth score fell from 80 to 13 in one year (in fact almost in one month).

Basic Value:

(click to enlarge)

The Basic Value score fell from 80 to 39 in one year.

Basic Quality:

(click to enlarge)

The Basic Quality score is slightly up in one year, but on a downtrend for five months.

All scores are relative to the NASDAQ 100 universe. The last chart shows the share price (in red) compared with the NASDAQ 100 Index (in blue):

(click to enlarge)

The stock price is up by about 85% in one year.

Here are the facts:

- YHOO has outperformed the NASDAQ 100 and QQQ by about 55% last twelve months.

- The Basic Growth and Value scores have gone down sharply in the same period.

- Using ten fundamental metrics, the average relative score of YHOO in the NASDAQ 100 is far under the mean: 30.4 / 100.

Conclusion:

There is a strong divergence between basic fundamental metrics and the price. It suggests that this stock is overvalued by the market in the NASDAQ 100 universe. YHOO has a strong momentum and may go higher with seasonal anomalies like window-dressing. It might be an opportunity for investors holding a long position to sell it before 2014. Seasonality makes a short trade quite risky in the next two months.

The metrics used here are standard ranks of Portfolio123. Formulas may be subject to intellectual property rights and cannot be published here. Click here for more info about them. Charts are courtesy of Portfolio123.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.