Reviewing Our 2013 Picks: MPEL, MSG, TTWO, YHOO, FL

5th Street Research

5th Street Research’s Buy Recommendations Easily Outperform The Market

Having been away from the market with other obligations for the past month or so, I thought it would be interesting to review our 2013 picks before making any new recommendations in 2014. Since launching in late September, we have published buy recommendations on 5 different companies: Melco Crown Entertainment (MPEL), Madison Square Garden (MSG), Take Two Interactive (TTWO), Yahoo (YHOO), and Foot Locker (FL). While the S&P 500 and Nasdaq finished out the year strong, our picks have easily outperformed the broad markets, returning an average of 16.5% vs. 7.5% for the S&P 500. A brief update on each of our recommendations below…

Melco Crown Entertainment (MPEL): City of Dreams Manila and Studio City Macau

Buy Recommendation
Published 9/27/2013: The Best Bet in Macau is Melco Crown Entertainment (MPEL)
Price Then: $31.60
Price Now: $42.99
% Change: +36%

MPEL

Macau as a whole has been the recipient of quite a bit of attention around here since launching, and for good reason… Macau has been the world’s fastest growing economy over the past decade with average annual GDP growth near 15%. It generates more than 7x  the revenue of Las Vegas and is the gambling epicenter of the world. Melco Crown’s City of Dreams is one of the most impressive properties in Macau and dominates the ultra important “Premium-Mass” market in the region. MPEL’s revenues and profits stand to explode over the next two years as they open two new massive properties, Studio City Macau and City of Dreams Manila. Studio City boasts the best location on the Cotai Strip, Macau’s version of Las Vegas Blvd., and is poised to be one of the biggest beneficiaries of the continued growth of the Macau. Despite the 36% gain since our initial recommendation of their shares, I continue to view MPEL as a strong buy for the foreseeable future.

Madison Square Garden (MSG): Hidden Assets and Rising Sports Franchise Valuations

Buy Recommendation
Published 10/11/2013: Significant Value in Madison Square Garden (MSG)
Price Then: $57.54
Price Now: $56.72
% Change: -1.4%

MSG

Madison Square Garden has been the laggard of our model portfolio thus far, currently down 1% since our original recommendation. The New York Knicks have gotten their season off to a terrible start this year, however there has been little to no other news or events out of MSG in the past 3 months. With the Madison Square Garden renovation project finally complete, cash flows and earnings will start becoming normalized for the first time since their IPO. The real story here though remains the hidden value of the company’s array of assets. As the owner of the Knicks and Rangers, MSG Networks, Madison Square Garden Arena and its associated air rights, and numerous other venues/ assets; MSG remains greatly undervalued when using a sum of the parts analysis. This one may require some patience, but I continue to view MSG as a strong buy.

Take Two Interactive (TTWO): Massive Cash Hoard, Best IP Portfolio in the Industry

Buy Recommendation
Published 10/15/13: GTA V Makes Take Two Interactive (TTWO) a Steal
Price Then: $16.94
Price Now: $17.80
% Change: +5%

TTWO

Although shares of Take Two have appreciated since our recommendation, they have lagged the market, which is somewhat perplexing after Grand Theft Auto V shattered analyst estimates and became the highest grossing entertainment release ever. While analysts anticipated TTWO would sell 18 million units of GTA V during their most recent quarter (a number I reported would prove to be very low), 25 million copies were actually sold. TTWO stock failed to jump on this news though, they actually traded down sharply the next few sessions as management failed to give much clarity regarding their future pipeline/ next blockbuster release. TTWO’s haul from GTA V should leave the company with more than $1B worth of cash on their balance sheet. With a market cap of only $1.6B, this cash hoard is substantial. Take Two also owns arguably the most valuable intellectual property portfolio in the industry with proven franchises such as GTA, BioShock, Red Dead Revolver, Max Payne, and NBA 2k. Despite management remaining mum on the next big release for now, they have an amazing track record when it comes to making hits. Everything considered, I see fair value for Take Two stock between $22-$24, at least 25% upside from today’s closing price. I maintain a buy rating on shares of TTWO.

Yahoo (YHOO): Alibaba Stake Continues to Create Value, Meyer on Acquisition Spree

Buy Recommendation
Published 10/15/2013: Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive
Price Then: $33.38
Price Now: $41.03
% Change: +22.9%

YHOO

As Alibaba continues their rapid growth, Yahoo continues to reap the rewards. Despite a core business that is still struggling to gain momentum, Yahoo had a great 2013 with shares more than doubling during the year. New CEO Marissa Mayer has been on quite the shopping spree since taking the helm, with Yahoo acquiring 28 companies in 2013, including a $1B purchase of Tumblr. Mayer has made it clear that she intends to ensure Yahoo remains the world’s homepage while also placing a large emphasis on mobile and content creation. In a demonstration of their commitment to content, Yahoo recently hired Katie Couric as a ‘global anchor’ and released a new News Digest App. It is yet to be seen how any of this efforts will pan out, but if nothing else, Mayer has been ambitious. YHOO should still see some upside from Alibaba as it nears its inevitable IPO and could get a lift from the news when announced, but shares aren’t as much of a bargain as they were 3 months ago. If you already own YHOO stock I wouldn’t be in any rush to sell it, but I wouldn’t be in any rush to go out and buy more either. I view shares as undervalued still with 10-15% upside, but would need to see core operations start to show signs of improvement before considering YHOO a strong buy at current levels.

Foot Locker (FL): Buy into Nike, Adidas, and Under Armour’s Growth at a Discount

Buy Recommendation
Published 10/26/2013: Try Foot Locker (FL) on for Size
Price Then: $34.20
Price Now: $41.11
% Change: +20.2%

FL

Last but certainly not least of our recommendations during 2013 was Foot Locker. The athletic apparel industry has been one of the strongest performers of the past 25 years. Nike is one of the all time great growth stocks and shows no sign of slowing momentum. Adidas and Under Armour fit the same mold. Justifiably so, all three of these companies trade at lofty valuations. Foot Locker is the largest retailer of athletic shoes in the US, dominating the market with the portfolio of brands including FootAction, Eastbay, Champs, and of course their namesake stores. Management has proven to be shareholder friendly, approving a $600 million buyback and an 11% dividend hike last year. While many retailers reported lackluster earnings in their most recent quarter, Foot Locker easily exceeded both earnings and revenue estimates. Despite all of this, shares still trade at a significant discount to retailers such as Finish Line and Dick’s Sporting Goods. The athletic apparel industry has shown no signs of slowing, and Foot Locker is as well positioned to benefit from this trend as anyone. As long as they continue to trade at such cheap valuations relative to their peers, I will continue to maintain a buy rating on shares of FL.

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 have no business relationship with any company whose stock is mentioned in this article.

Yahoo (YHOO) Announces $5 Billion Stock Buyback

yahoo-logo

Yahoo (YHOO) Increases Stock Buyback Plan, To Offer $1 billion of Convertible Notes

Yahoo (YHOO) announced today that they would be offering $1 billion of convertible notes due 2018 and are also increasing their buyback plan. YHOO has been aggressive in buying back shares recently, and has only $300 million left on their current plan. Management showed that they clearly feel Yahoo is still undervalued at current levels and would continue buying, announcing a $5 billion repurchase plan today, an amount that would account for nearly 1/7th of their outstanding shares at yesterday’s closing price. Yahoo currently has $3.2 billion in cash on their balance sheet and extremely valuable stakes in Alibaba and Yahoo Japan. They will be required to sell a significant percentage of their Alibaba stake in the event of an Alibaba IPO. Last week I highlighted numerous charts of YHOO, they have been a strong performer as of late and we expect shares to respond favorably to this news. I believe YHOO stock is a buy and will reach $40 within the next couple of months.

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 have no business relationship with any company whose stock is mentioned in this article.

How long will Yahoo (YHOO) Shares Keep Running

YHOO Long Term

Yahoo (YHOO) Could Find Resistance at $40

Yahoo (YHOO) shares have had quite a run as of late, up 10% in their last 5 trading days. After using a short-term chart of YHOO to anticipate their action this week, with shares now at a 7 year high it is necessary to take a look their long-term chart to determine where shares may next run into resistance. Looking at all available price action data available on Yahoo’s stock, we can see that historically shares have been met with a good deal of resistance near $40, only eclipsing that figure for a meaningful amount of time during the internet bubble of 1999. Coincidentally, when analyzing Yahoo’s fundamentals last month, the high-end of our determined fair valuation range for YHOO was $40. From both a technical and fundamental perspective I believe shares will appreciate by another 12% in the short-term barring a major downturn in the US equity markets.

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 have no business relationship with any company whose stock is mentioned in this article.

Yahoo (YHOO) Shares Close at New 52 Week High

YHOO 4

Yahoo (YHOO) Stock at 52 Week High, Highest Price Since January 2006

Yahoo (YHOO) is making a lot of people look/ feel pretty smart this week as shares continued their surge today. YHOO opened down this morning but remained in a steady uptrend throughout the day, filling the gap on their chart created by yesterday’s price action and setting a new 52 week high in the process. Not just a 52 week high, today was Yahoo’s highest closing price since January 2006. As mentioned yesterday, there is no overhead resistance on YHOO’s chart now and shares have plenty of room to continue their run. In my analysis of Yahoo last month I suggested they were undervalued and that their fair value was in the range of $38- $40 per share. I will review and update my recommendation of YHOO next week if shares continue to close in on my target price.

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 have no business relationship with any company whose stock is mentioned in this article.

Yahoo (YHOO) Stock Continues Strength, Over $34

YHOO 3

Yahoo (YHOO) Shares Remain Strong

In what is seemingly becoming a daily column, we take a look at Yahoo’s (YHOO) price action once again. After breaking out of a wedge pattern yesterday, YHOO stock gapped up once again today taking out the key $34 level as we had expected. Despite a down day for the markets, Yahoo displayed strength all day and remained above $34. I believe this price will now provide support to the downside, and looking at YHOO’s chart now, there is little overhead resistance to be found. This stock is firing on all cylinders at the moment from a technical analysis perspective.

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 have no business relationship with any company whose stock is mentioned in this article.

Yahoo (YHOO) Breaks Out, Little Resistance Above $34

YHOO Breaks Out of Wedge

Yahoo (YHOO) Gaps Up, Out of Falling Wedge

Yesterday we highlighted a chart of Yahoo (YHOO), showing a close on Friday just above the falling wedge pattern they have been trading within the past month. I was looking for a confirmation of that break out today and Yahoo followed through, gapping up on the open and finishing the day well above Friday’s close. Looking at the chart now, YHOO faces slight resistance at $34 and has a good deal of upside from a technical perspective once taking out that barrier. Another strong day tomorrow will take shares of YHOO above $34 and on their way to our $38 target price.

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 have no business relationship with any company whose stock is mentioned in this article.

Is Yahoo (YHOO) About to Break Out of Their Channel?

YHOO 11/10/2013

Yahoo (YHOO) Looks to Break Out This Week

Since highlighting Yahoo (YHOO) last month, shares are flat, after trading between $32- $34 on relatively low volume the past few weeks. When drawing trend lines on their chart, we can see that Yahoo closed above the channel on Friday. A follow through on that action tomorrow could signal a potential break out and good entry point for YHOO. Should shares fail to remain above $33 tomorrow, we could see $32 again this week, and would look to enter a position there. I believe YHOO is currently undervalued by nearly 20% based on the value of their Alibaba stake, Yahoo Japan stake, and core business operations.

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 have no business relationship with any company whose stock is mentioned in this article.

Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive

Yahoo (YHOO): Amended Agreement With Alibaba Should Prove Beneficial

Following yesterday’s closing bell, Yahoo (YHOO) reported their Q3 results and perhaps more importantly announced an amendment to their agreement with the Alibaba Group that reduces the maximum amount of shares Yahoo would be required to sell in the event of an Alibaba IPO. Under the original agreement Yahoo could have been forced to sell 261.5 million of their 523.6 million shares when Alibaba goes public, a move that appears imminent. After amending their agreement Yahoo can now only be required to sell 208 million shares. Shares of YHOO have more than doubled this year while operations have floundered, proving that at this point Yahoo is more of an Alibaba story than a Yahoo story per se. Yahoo’s 523.6 million shares of Alibaba represents an approximately 24% stake in the Chinese e-commerce group.

Alibaba is expected to file for a $15 billion IPO in 2014 that will valuing the company over $100 billion, expected by at least four analysts to command a valuation of at least $120 billion. At a valuation of $120 billion, Yahoo’s 24% stake would be worth $28.8 billion. One concern for YHOO shareholders stemming from the original arrangement regarding the IPO, was the notion that Alibaba might intentionally under-price their IPO, not needing to raise funds and force Yahoo to dump their shares at a low valuation. This becomes less likely with YHOO being required to unload 20% less shares. Yahoo also stands to benefit more from further appreciation in Alibaba’s valuation following their highly anticipated IPO. Alibaba’s revenue grew 61% to $1.74 billion in their most recent quarter while net income rose 159% to $707 million. They are by far the largest e-commerce player in China, one of the most lucrative markets you could possibly have a stranglehold on in the world.

YHOO is Undervalued at Current Levels

Given yesterday’s closing price of $33.38 per share, Yahoo currently has an enterprise value of $32.2 billion with about $2 billion in cash on their balance sheet. If Alibaba were to IPO tomorrow for $100 billion, less than many analysts anticipate, Yahoo’s total position would be worth $24 billion. They would be required to sell 40% of that position which would net YHOO $9.6 billion, or $6.25 billion assuming a 35% tax rate on their investment gain. For the purposes of our analysis lets assume they unload all of their shares at the time of the IPO, which would net $15.6 billion after taxes. In addition to their Alibaba stake Yahoo also owns 35% of Yahoo Japan, a position worth about $10.5 billion. If they were to liquidate that position as well and we assumed the same 35% tax rate, Yahoo Japan would carry a liquidation value of $6.8 billion. Subtracting this $22.4 billion in assets from Yahoo’s enterprise value, we can determine that the market is placing a value of about $9.8 billion on Yahoo’s core business. Including  yesterday’s results, Yahoo has generated net income of $1.29 billion over the past year. They have been aggressively acquiring companies this year, most notably Tumblr. While the effort to innovate is admirable, even if only through acquisitions, Yahoo’s core business continues to be stagnant. Revenues actually declined 5% year over year for Q3, so management needs to prove they  can start successfully implementing some of their acquisitions successfully to start fueling some growth before Yahoo can trade at multiples anywhere near its peers in the internet space. Taking this into account we will value Yahoo’s core business at only 12x trailing 12 months earnings, or about $15.5 billion. When taking into account all of Yahoo’s investments and placing a value upon their own operations, I believe YHOO should have an enterprise value of $37-$38 billion, a premium of 15%- 18% over yesterday’s closing price. Shares have the potential for even further upside should Alibaba continue to outperform as we anticipate they will, even more so now that they can retain an extra 10% of their stake following the impending IPO. YHOO is attractively priced at current levels.

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 have no business relationship with any company whose stock is mentioned in this article.

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