Is Yahoo an Attractive Investment?

With shares of Yahoo (NASDAQ:YHOO) trading around $38, is YHOO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Yahoo is a technology company that provides search, content, and communication tools on the web and on mobile devices worldwide. It operates Yahoo.com, which offers Yahoo Search, Yahoo News, Yahoo Sports, Yahoo Finance, Yahoo Entertainment and Lifestyles, and Yahoo Video. Being such a large content provider, Yahoo is able to reach a significant amount of consumers across the globe. As the internet attracts an increasing number of participants, look for Yahoo to continue to be a major player.

Yahoo has announced its second acquisition of the week, scooping up the team behind DreamWorks Animation’s (NASDAQ:DWA) Ptch app. Ptch announced the acquisition in a post on its blog on Tuesday. “Today, we’re excited to announce that Ptch will be joining Yahoo. As part of the Yahoo team, we’ll be able to focus our efforts and leverage our technology to make Yahoo’s photo and video platforms the best in the world,” the Ptch team said. The app will be closing down on January 2, 2014 and users have until then to download their photo montages made using the app. The fact that the app is being shuttered suggests that the acquisition was mostly a move to hire the Ptch team. Yahoo CEO Marissa Mayer has made many such acquisitions during her time at the helm of the company as she seeks to hire the brightest minds she can get her hands on to strengthen Yahoo’s position in mobile.

T = Technicals on the Stock Chart Are Strong

Yahoo stock has been exploding to the upside in the last several months. The stock is currently trading near all time highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Yahoo is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Yahoo options may help determine if investors are bullish, neutral, or bearish.

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Yahoo’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Yahoo look like and more importantly, how did the markets like these numbers?

Yahoo has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Yahoo’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Yahoo stock done relative to its peers, Google (NASDAQ:GOOG), AOL (NYSE:AOL), Microsoft (NASDAQ:MSFT), and sector?

Yahoo has been a relative performance leader, year-to-date.

Conclusion

Yahoo is an Internet bellwether that provides a multitude of services to consumers and companies worldwide. The company announced its second acquisition of the week, scooping up the team behind DreamWorks Animation’s Ptch app. The stock has been moving higher in recent quarters and is now trading near all time highs. Over the last four quarters, earnings and revenues have been mixed, which have produced conflicting feelings among investors about earnings announcements. Relative to its peers and sector, Yahoo has been a year-to-date performance leader. Look for Yahoo to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.