Yahoo: If It Sounds Too Good To Be True...

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 |  About: Yahoo! Inc. (YHOO)
by: David Alton Clark

Summary

Yahoo is at the end of a long bull run up.

The rally in the stock is due to Yahoo’s 24% stake in Alibaba, which is expected to IPO shortly.

The company just reported earnings and the stock is up significantly.

The Alibaba IPO may be a ‘sell the news’ occasion.

"If It Seems Too Good To Be True It Probably Is"

Everyone knows the timeworn proverb and has most likely been hurt by its inescapable certainty. What ensues is eventually the other shoe drops. The truth unfortunately rears its ugly head at some point.

This saying came to my mind when listening to the various pundits prognosticating Yahoo (NASDAQ:YHOO) is a sure bet homerun. The repetitive chant is Yahoo is currently trading for less than the value of the company's 24% stake in Alibaba. So essentially you get Yahoo's core assets for free. Expecting to get something for nothing is a foolish endeavor. I posit the Alibaba IPO will be a buy the rumor, sell the news spectacle.

A Buy the Rumor, Sell the News set-up?

The "buy the rumor, sell the news" set-up occurs all the time in the markets today. Investors buy up stocks based on what they believe will happen in a given earnings report, economic event or new company IPO (the rumor). After the event transpires or the report is released (the news), they dump their positions and the stock moves lower. These buy the rumor, sell the news spectacles often apply to things like the Alibaba IPO being announced. It seems Yahoo's stock has rallied significantly over time since the news has been out for quite some time.

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(Chart provided by Finviz.com)

What happens is the stock rallies hard into the event. The rally occurs because investors, emboldened by the rumors that their favorite stock -- Yahoo, in this case -- is going to clean up in regard to the upcoming Alibaba IPO, and has new products on the horizon that are a sure thing to be successful and are revolutionary. The buying prior to the event runs the stock up significantly, leaving it vulnerable to profit-taking once the actual IPO takes place.

Three possible outcomes

Now, this is only one of three possible scenarios, although it is the most likely outcome. A second occurrence, which has an even more devastating outcome, is the event is not impressive and the short-term investors in the stock for a quick buck bail immediately, along with long-term investors who are devastated by the debacle. The third outcome is the IPO and products released are colossal hits out of the ballpark, propelling the stock even higher, the rarest of outcomes.

Yahoo's stock current action analysis

Let's review Yahoo's current action and investor activity to determine if Yahoo may fit into this scenario. First, is Yahoo's stock running up significant gains into the event based on positive news hype? In a word, yes. Yahoo is up 50% over the last year, and rose 7% today on news of a slight earnings beat. Most of the upside was attributed to getting some insights into the metrics of Alibaba.

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(Chart provided by CNBC.com)

The "buy the rumor" portion of my thesis is proven. There is no disputing investors are chomping at the bit to get into the stock prior to the Alibaba IPO. The first part of the premise has already been revealed as true, people are definitely buying on the rumor. All that is left is to see if they sell the news. Hopefully they won't, and current Yahoo shareholders will be justly rewarded.

Other Downside Risks

The market seems conflicted these days. One day it's up, and the next it's down. The recent flare-up of cold war tensions between the US and Russia has placed many investors on edge. The possibility of further, more biting sanctions being placed on Russia by the US and EU would not be good news for the global recovery. Further, the repercussions that may arise from the Russian response to the sanctions could drive down the stock process on major multinational companies, such as Yahoo. Not to mention if Russia decides to invade Ukraine outright.

Conclusion

When you invest in a stock, you need to see the forest through the trees. With Yahoo running up so much prior to the Alibaba IPO, I believe the risk/reward equation for starting a position is now unfavorable. The news seems telegraphed at this point. I submit the party may be just about over. But I've been wrong before. This could be a major buying opportunity right now.

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.