Does Marissa Mayer Make Yahoo Stock A Worthwhile Bet?

Granted, I am a numbers guy, so even asking whether a new CEO is enough to warrant buying a stock is a stretch for me. While quality leadership is certainly important, successful stock market investments require the numbers to work and no matter how great the CEO, they can’t magically make the numbers work all by themselves (unless you want the books to be cooked of course). Still, I am intrigued by Marissa Mayer’s hire as the new CEO at Yahoo (YHOO), even though the company is clearly not gaining relevancy on the Internet. A 1990’s darling, Yahoo has lost its lead in search (thanks to Mayer’s former employer, Google) and really only has a stronghold in a few areas of the web, such as email and fantasy sports.

Still, considering who has been occupying the corner office at Yahoo over the last decade, it is compelling that a tech person of Mayer’s caliber is now running the show. From 2001 to 2007 the company was headed by a movie studio exec (Terry Semel). From 2009 to 2011, they brought in a Silicon Valley veteran (Carol Bartz), but she previously ran Autodesk, a software company that sells products to help engineers design factories, buildings, and 3D animated characters. Is it really that surprising that Yahoo has been treading water for all these years?

Enter Marissa Mayer, Google’s 20th employee (and first woman engineer) who had been leading successful efforts in areas where Yahoo actually competes, like web search. If anyone can help reinvigorate Yahoo, it might just be her. But isn’t that taking a big leap of faith? Sure, but there is another factor, other than the CEO, that makes a bet on Yahoo shares at $16 each worth a look. The numbers.

Yahoo’s current market value is less than $20 billion. As of September 30th, the company’s stake in Yahoo Japan ($7.7 billion) and Alibaba ($8.1 billion) account for the majority of that valuation. Even if you deduct the tax liability that would be incurred if Yahoo were to monetize these stakes, the organic Yahoo operations are priced at just $10 billion. What do investors get for that $10 billion? To start, how about nearly $7 billion of net cash on the balance sheet (plenty for Mayer to begin a transformation)? That leaves a mere $3 billion valuation on Yahoo’s core operations, which generated free cash flow of $250 million in 2011. That is a low price even if the company doesn’t grow at all going forward.

Yahoo stock today looks to me like a call option on Marissa Mayer. As I said before, a CEO alone is not a good reason to buy a stock. But what if you have a unique change in leadership that could very well pay off in spades, and the meager public market valuation of the company basically affords you limited downside risk? The combination of those two factors makes the stock an interesting opportunity in my view. If Mayer, like her predecessors, fails to reinvigorate the company, then the shares likely stagnate here in the mid teens. However, if she succeeds, as her resume seems to suggest she could, there is a lot of upside to the story. It feels weird for me to say, but Yahoo at $16 with Carol Bartz running the show didn’t interest me one bit. With Mayer it’s a different story.

Full Disclosure: Long shares of Yahoo at the time of writing, but positions may change at any time


Chipotle Stock: Rapidly Approaching An Attractive Level

Hedge fund titan David Einhorn has been on fire in recent years with his bearish calls (Lehman Brothers, St Joe, Green Mountain, etc) and his latest presentation at the Value Investing Congress detailed a negative outlook for Mexican fast casual restaurant chain Chipotle Mexican Grill (CMG). Some of his points on CMG were easier to agree with (sky-high valuation, slowing growth, pricing pressures) than others (a strong competitive threat from Taco Bell?) but he nailed another one of his calls. CMG shares are falling $30 today after the company reported a disappointing quarter last night. The stock now sits just above $250, down from a high of $442 hit in April of this year.

Chipotle stock long surpassed any level that I consider a good value, but as its recent descent continues, it makes sense to at least pinpoint a price at which it might warrant consideration on the long side. After all, the company still has a very attractive longer term unit growth outlook, is likely to remain very popular with consumers, and the company sports one of the highest operating margins I have ever seen generated by a restaurant company (27% unit-level operating margins).

The reasons for the stock’s decline lately are completely justified even though they don’t really impact the long-term business outlook for the company. The valuation was crazy before (at $442 per share it traded at a 50 forward P/E ratio) and comp sales growth of high single digits or more was definitely not sustainable. Yesterday the company offered 2013 guidance of 12% unit growth and indicated comps could be flat. While such an outlook will hurt shares short term, longer term it is not terribly worrisome.

With the stock now down more than 40% from its high, I do not think it is far off from a fair price, though it is not quite there yet. If the shares fell to around the $225 level, which equates to about 12 times cash flow, I would start to get interested. This is definitely one growth company to watch, as negative business momentum short term could very well send the stock down to value territory if investors’ disappointment continues.

Kudos to David Einhorn for another timely call. I would never suggest investors’ blindly follow any investor, but Einhorn is clearly one of the best around right now and it worth paying attention to when he gives public presentations. We can all learn a lot from him.

Full Disclosure: No position in any of the companies mentioned at the time of writing, but positions may change at any time

Investors in Sarepta Therapeutics Should Think About Selling Some

Today’s big stock market winner is Sarepta Therapeutics (SRPT), a small biotech company developing Eteplirsen, a novel therapy for Duchenne Muscular Dystrophy. Shares are rocketing higher by a stunning 175% today, from $15 to $41 each, on news that a phase 2 study showed promising results compared with placebo.

There are some red flags though, that should be pointed out. The study was completed on just 12 patients, normally not a large enough sample to get FDA approval. And 4 of those were the placebo group, so only 8 subjects received the drug for the full 48 week trial period. Second, the particular genetic mutation this drug targets is only present in 13% of cases, so the potential patient pool here is only about 2,000 people in the United States.

At a price of $400,000 per year (a typical level for orphan drugs that treat small patient populations), U.S. sales could reach $800 million if the drug is approved and every patient takes it. There are a lot of “ifs” in this scenario, however, and after today’s huge stock price jump, Sarepta is being valued at nearly $1 billion already. FDA approval, even if it comes, it not right around the corner.

Long investors would be wise to consider taking some of their gains off of the table. Small cap biotech stocks like this are quite risky, especially after having nearly tripled in a single day. Situations like this can easily go either way longer term.

Full Disclosure: No position in SRPT at the time of writing, but positions may change at any time