Is Yahoo’s Stock Still a Buy After Its Big Run?

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With shares of Yahoo (NASDAQ:YHOO) trading at around $18.77, is YHOO a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Yahoo was recently added to Goldman Sachs’s Conviction Buy List. A price target of $24 has been set. As you might already know, Goldman Sachs has an exceptional record in regards to stocks added to their Conviction Buy List. Therefore, this is a good sign for Yahoo.

Yahoo recently had a strong quarter with an upside surprise, which has helped drive the stock higher. Other catalysts have been plans for future buybacks as well as plans to implement cost reductions. Yet another positive is that search results have improved.

E = Debt to Equity Ratio is Impressive

Yahoo has a debt-to-equity ratio of .008, which is exceptionally low. It’s even more impressive than Google (NASDAQ:GOOG), which has a debt-to-equity ratio of .091. There isn’t much difference there, but any time a company can beat Google in any area, it’s worth noting. AOL (NYSE:AOL) has a debt-to-equity ratio of .091.

Yahoo has $8.413 billion in cash and $127.53 million in debt. Based on these numbers alone, it’s easy to see Yahoo will be around for a very long time. Yahoo also has over $2 billion in operating cash flow.

T = Technicals on the Stock Chart Are Strong

Yahoo has greatly outperformed the S&P 500 over the past month and has been relatively on par with the S&P 500 over the past three years.

Over the past month, Yahoo is up 12.57% while the S&P 500 is down .66%. Year-to-date, Yahoo is up 17.17% while the S&P 500 is up 13.50%. Over the past calendar year, Yahoo is up 23.13% while the S&P 500 is up 23.48%. When you look at three-year returns, Yahoo is up 26% while the S&P 500 is only up 36.46%.

Yahoo is currently trading a couple of dollars higher than its 50-day SMA of $16.61. It’s trading nearly three dollars higher than its 100-day SMA of $16.05. It’s trading more than three dollars higher than its 200-day moving average of $15.65.

These numbers show strength. As long as the overall market can stay afloat, that strength should continue.

E = Earnings and Growth Are Steady

Growth has been steady over the past five years. Revenue for 2011 was down, but that’s just a bump in the road and shouldn’t be of serious concern to any potential investor:

2007 2008 2009 2010 2011
Revenue ($)in billions 6.969 7.209 6.460 6.325 4.984
Diluted EPS ($) .47 .29 .42 .90 .82

 

The quarterly numbers are steady at the very least:

     9/2011      12/2011      3/2012      6/2012      9/2012
Revenue ($)in billions 1.217 1.324 1.221 1.218 1.202
Diluted EPS ($) .23 .24 .23 .18 2.64

 

T = Trends Support the Industry in Which Yahoo Operates

At one time, Yahoo was the king of search. Today, the former king has a lot of competition. Not only is Google a threat, but Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are beginning to gobble up market share.

The good news: Yahoo is in an industry still in its infant stages and Yahoo is, and will remain to be, a major player in that industry for decades.

Conclusion

A lot of people like to compare the Internet to the automobile industry in its early stages. In both situations, we saw enormous growth. While the automobile industry slowed down, there was still a lot of profit to go around. The biggest players traded the top spot throughout the years and decades. The same will happen with Internet-related companies, such as Yahoo, Google, Amazon, and Facebook. It’s difficult to see Yahoo competing with some of these names, but they have plenty of firepower (i.e., cash) at their disposal. All they need now is a little innovation, especially with mobile and social.

Yahoo’s long-term prospects are superb. Therefore, Yahoo is a long-term OUTPERFORM.

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