Jubak's Journal: Buy Yahoo! -- It can't get any worse
The news on the bond market, the economy and Internet companies has gone from bad to terrible. That's a 'buy' signal to me.
By Jim Jubak
source: moneycentral.msn.com
I think it's time to buy Yahoo!.
After Monday's rout in Internet shares, the stock is well below the $130 target price I calculated in my May 31 column ("3 steps for winning the next market war"). It closed at $119.25 a share on Monday, June 14. But frankly the low share price isn't what has led me to act now -- after all Yahoo!'s price is still way above the 52-week low of $27.75 a share.
So why have I decided not to wait? In a nutshell, because in the last few days the news -- from the bond market, on the economy, and from several big Internet companies -- has been so terrible. As the negatives have piled up, I found myself asking: "What else could go wrong?"
The answer, I think, is: "Not much." And to me, that means Internet stocks are near the kind of "bad news climax" that constitutes a buy signal.
It's important to set price targets for buying a stock as I did for Yahoo! (YHOO), Metromedia Fiber Network (MFNX), RF Micro Devices (RFMD), Exodus Communications (EXDS), Qwest Communications (QWST), Aware (AWRE) and Applied Materials (AMAT). But those targets shouldn't become straitjackets. I don't think anyone can call an absolute bottom (or top) in a stock, and refusing to
pull the trigger until a stock hits a specific number right on the head could leave you on the sidelines for the sake of a dollar -- or five -- a share. It might be good as an exercise in intellectual rigor, but it could be awful for your bottom line.
To be most useful, a target price needs to be constantly weighed against changing market conditions. What has happened to the stock's price when the market has fallen or rallied? How much has it dropped on bad news? What does the future news flow look like? After weighing those factors for Yahoo!, I believe that the stock is priced right for buying; I'm adding it to Jubak's Picks with this column. And I think the process I've gone through to reach that decision works for any stock.
The pieces fall into place
On June 1, the first trading day after I set my $130 buy target for Yahoo!, the stock closed at $138. The next day, it kissed $130 briefly during the day before closing at $142.50. Thanks to the facts of life of this column -- I can only buy or sell on Tuesdays and Fridays, the days when it appears -- I missed that fleeting opportunity.
But I'm not sure I would have pounced even if I'd had the chance. Sure, the stock had hit my target, but looking at the market and other Internet stocks, I wasn't convinced that this was a bottom. Interest rates on the 30-year Treasury bond had climbed to more than 5.9%, but the bond market still was very nervous. Internet stocks had plunged by 30% to 50%. At $130, Yahoo! was 47% off its 52-week high of $244. But there hadn't been any specific bad news from any of the sector leaders. My analysis told me that $130 was an attractive price for Yahoo!, but market conditions left me feeling that there was still substantial risk in the stock, even at that price.
Two weeks later, I'm willing to buy the stock. Look at what's happened in that fortnight.
The bond market continues to crumble. On Friday, the yield on the 30-year Treasury bond hit 6.15%. That's just 10 basis points, or 0.1% from the 6.25% yield projected for year-end 1999 by pessimistic analysts.
The numbers show that the economy is too hot. On the morning of June 11, the U.S. Department of Commerce reported that May retail sales were up a stronger-than-expected 1%, more than the already-strong 0.8% rise in April. Producer prices (the prices paid to the farmers and manufacturers that make goods) climbed 0.2% in May, according to the U.S. Department of Labor -- the third straight monthly gain. And the price of raw materials climbed 5.5% in May. That's the biggest monthly increase in more than two years.
Dips at CMGI, AOL and eBay
CMGI Inc. (CMGI), a stock widely seen as the equivalent of a closed-end mutual fund for the Internet sector, delivered highly disappointing earnings for its third quarter. Wall Street had projected a loss of 18 cents a share;
the company reported a loss of 30 cents. CMGI shares fell another $11.75 on the news, and after Monday, they're down 54% from their 52-week high.
America Online (AOL), another Internet leader, could disappoint investors when it releases its June quarter numbers, said Merrill Lynch Internet analyst Henry Blodget, who has been a major bullish voice on the company. Subscriber growth in Europe is slower than expected, Blodget noted on June 11. That should be offset by faster-than-projected growth in the United States, he added, but the damage was done. America Online, a Jubak's Pick, fell another $6 a share to $99.50. The shares are now down 48% from their 52-week high.
And as a final insult, eBay's (EBAY) auction site went down and stayed down for more than 20 hours as company engineers rebuilt the crashed system from backup files. The reminder that yet another fast-growing Internet company couldn't handle its growth didn't exactly please investors. eBay shares fell 25% in two days.
That's a lot of really bad news, and it certainly hasn't left Yahoo!
unscathed. The stock had rallied from that brief flirtation with $130 to a high of $151.88 on June 7 before reversing course to finish at $119.25 on June 14. On that day alone it fell $16 a share.
But this barrage of bad news actually makes me feel good about the stock at this price. After all, what else can go wrong?
Oh sure, interest rates can climb some more until the Federal Reserve meets June 29 and 30. The release of the Consumer Price Index on Wednesday and Alan Greenspan's testimony before Congress on Thursday will definitely make bond investors edgy.
Increased yields and anxiety
But now, every basis-point increase tacked on by a nervous bond market actually puts more pressure on the Fed to act. The bond market is way ahead of Greenspan and company (the Federal Funds rate is still at 4.75%) and is probably pushing up interest rates at a faster pace than the Fed itself would like. A failure to raise rates at the end of June probably would make the bond market even more nervous and send yields yet higher. I'm convinced the Fed will increase rates in June, and that will lower bond yields for a while (at least until the bond market starts to worry about a second rate increase).
Another Internet company could show signs of weaker growth or another big site could go down, of course. But it's hard to imagine that making investors significantly more negative than they already are on the sector.
The odds are that over the next month, good news will outweigh bad. The bond market will continue to slump, sending rates a bit higher, but then it will rally on action by the Fed. In the middle of July, Internet companies will start to report revenue growth (forget earnings), demonstrating that the best of the class is still growing at 50% to 100%. CMGI may have reported a bigger-than-expected loss, but net revenues still grew by 141% from the same quarter in 1998.
So, as odd as it seems if you take the extreme pessimism about all things Internet that rules the market today, I'm more comfortable buying Yahoo! today than I would have been two weeks ago. After all the recent bad news, I think there's less potential downside in the stock. And I'm two weeks closer to the rally that I expect in Internet stocks in early July after the Federal Reserve acts and as companies begin to report.
And it doesn't hurt that by waiting two weeks, I can get the stock $10 a share cheaper.
Changes to Jubak's Picks
Add Yahoo! (YHOO)
If anybody can make the advertising-based portal model work on the Internet, it will be Yahoo! (YHOO), one of the best-managed Internet companies. The leading portal site on the Internet will get a boost from the recent acquisitions of Broadcast.com and GeoCities. They push Yahoo! into personal Web pages and Internet-based audio and video. The stock has been crushed along with the rest of the Internet sector and recently traded at $120, more than $110 a share off its 52-week high. That takes a lot of risk out of the shares. I expect the stock to rally strongly in the next four to six weeks on earnings and a general market rise after the Federal Reserve meets June 29 and 30. I'm adding Yahoo! to Jubak's Picks with a September price target of
$170 a share.
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Updates
New Developments on Past Columns
Jumpin' jitters -- this is one nervous market!
Inktomi (INKT) just landed two big ones. The company announced June 14 that
America Online (AOL), which already uses Inktomi's Traffic Server network
cache software, would build its next-generation Internet search product
around Inktomi's search engine. The previous Friday, Inktomi announced that
Mobilcom, the big German telecommunications and Internet service provider,
would use Inktomi's search, shopping and network cache software. This is the
biggest win to date for the European search service that Inktomi announced in
May 1999. I continue to recommend purchase of Inktomi shares at current
depressed prices.
Like people, some stocks improve with age
Think of it as a chess game. Global Crossing (GBLX) puts together a deal to
buy Frontier (FRO) and then adds a complicated bid for U S West (USW). Days
after the market was abuzz with rumors that BellSouth (BLS) would buy the 90%
of Qwest Communications (QWST) that it doesn't own already, Qwest turns
around and makes a hostile bid for Frontier and U S West. About the only
thing we know for sure is that investors don't think much of either Global
Crossing or Qwest acquiring U S West -- both stocks plunged after management
announced a bid. I'd have to agree with that sentiment -- I don't see
acquisition of the deeply troubled regional Bell company adding much besides
endless headaches to either of the two next-generation telecommunication
companies. The price plunge is important because it first put the Global
Crossing offer for Frontier in danger and now a similar fall has made the
Qwest offer much less attractive to Frontier and U S West management. It's
unclear to me whether Qwest really wants to win this war. The objective might
be to cripple a competitor by forcing Global Crossing to pay a higher price
or to strike a deal with Global Crossing or Frontier that would strip out
specific assets. It's certainly interesting that Qwest has structured its
offer as two separate deals, one for Frontier and one from U S West. |
