Netflix and Tesla: Early Signs of Froth in a Bull Market

It is quite common for a bull market to last far longer than many would have thought, and even more so after the brutal economic downturn we had in 2008-2009. Only just recently did U.S. stocks surpass the previous market top reached in 2007. Although it does not mean that a correction is definitely imminent, the current stock market rally is the longest the U.S. has ever seen without a 5% correction. Ever. Dig deeper and we can begin to see some froth in many high-flying market darlings. Fortunately, we are not anywhere near the bubble conditions of the late 1990’s, when companies would see their share prices double within days just by announcing that they were launching an e-commerce web site. However, some of these charts have really taken off in recent weeks and I think it is worth mentioning, as U.S. stocks are getting quite overbought. Here are some examples:

TESLA MOTORS – TSLA – $30 to $90 in 4 months:


NETFLIX – NFLX – $50 to $250 in 8 months:


GOOGLE – GOOG – $550 to $920 in 10 months:



You can even find some overly bullish trading activity in slow-growing, boring companies that do not have “new economy” secular trends at their backs, or those that were left for dead not too long ago:

BEST BUY – BBY – $12 to $27 in 4 months:


CLOROX – CLX – $67 to $90 in 1 year:

WALGREEN – WAG – $32 to $50 in 6 months:



Ladies and gentlemen, we have bull market lift-off. My advice would be to pay extra-close attention to valuation in stocks you are buying and/or holding at this point in the cycle. While the P/E ratio for the broad market (16x) is not excessive (it peaked at 18x at the top of the housing/credit bubble in 2007), we are only 15-20% away from those kinds of levels. Food for thought. I remain unalarmed, but definitely cautious to some degree nonetheless, and a few more months of continued market action like this may change my mind.

Full Disclosure: No positions in any of the stocks shown in the charts above, but positions may change at any time

Qualcomm Now Hoarding More Cash Than Apple On Relative Basis

Qualcomm (QCOM), the leading provider of chipsets for wireless consumer devices, has seen its stock price underperform the S&P 500 index over the last year (see chart below), which could prompt shareholders to get more vocal about the company’s sub-optimal capital allocation practices later this year. We have seen with Apple that hoarding capital can negatively impact the multiple that investors are willing to pay for a company’s shares. In fact, Apple’s stock has rebounded nicely in recent weeks, after the company announced it was increasing the size of its share repurchase program by 500%, from $10 billion to $60 billion.

Believe it or not, Qualcomm’s cash hoard has eclipsed the $30 billion mark as of March 31st, though the company has no debt. On a relative basis, this is actually more anti-shareholder than Apple. QCOM’s cash amounts to 1.4 times the company’s annual revenue, 4 times annual cash flow, and more than 26 years’ worth of capital expenditures. Compare that to Apple’s $145 billion of cash as of March 31st, which comes to 0.85 times annual revenue, 2.5 times annual cash flow, and more than 14 years’ worth of capital expenditures.

For investors interested in Qualcomm as an investment, the future will clearly be impacted by how (or if) the company’s capital allocation actions change over time. Just as Apple’s share price plunge from over $700 to under $400 resulted in a louder chorus from investors about the return of cash, continued underperformance by QCOM stock might just have the same impact. The company certainly does not need $30 billion of cash sitting in the bank.

Full Disclosure: Long Apple and no position in QCOM at the time of writing, but positions may change at any time

Alright Apple, Let’s Tackle This Cash Issue Once And For All

I am drafting my quarterly letter to clients right now and given the poor performance of Apple (AAPL) shares during the first quarter, it is a stock I have been adding to lately on the long side, even as it has clearly negatively impacted portfolio performance so far in 2013 (down 16% vs S&P 500 up 10%). The bullish argument is quite simple; the stock trades at a discount to pretty much every other large cap technology company. The lack of momentum in their business right now is clearly hurting the stock, but the lack of a cash plan is just as important, in my view. They need to take decisive action soon, if for no other reason than it will allow them to not keep hearing about it quarter after quarter in the future.

There is an argument out there that shareholders should not care if Apple holds its cash or uses it to buyback stock or pay dividends to shareholders. It’s an academic argument really, as finance textbooks insist that a $50 per share dividend will decrease the value of the stock by exactly $50, so shareholders are not better off one way or the other.

But think about this. Right now Apple is earning about 1% on $137 billion of cash (actually, the quarter just ended so they likely have closer to $150 billion as of today, although they won’t report earnings for a few weeks). They have two other options for that cash; repurchase stock or pay dividends. The idea that shareholders should be indifferent to those three choices is just silly. If Apple repurchased shares, the stock would only have to rise by more than 1% per year in the future to be serving shareholders better than their current hoarding strategy (even Apple bears would likely concede that a 2% annual return is a reasonable future outcome).

The case with a dividend is a bit more complex, but still easy to understand. If Apple pays out its cash to shareholders, the shareholder would have to reinvest it themselves and earn more than 1% per year on their own in order to be in a better situation than they are now. We could easily achieve that hurdle rate. What if you own Apple in a taxable account and have to pay taxes on those dividends? Instead of beating 1% per year you would have to earn about 1.2% per year. Again, piece of cake. What if Apple had to repatriate the cash from overseas and pay income taxes on that money before paying out the dividend? Instead of needing to earn 1.2% per year, shareholders would have to earn about 2% per year investing the money themselves. Again, piece of cake.

The math: $1 of overseas cash after repatriation taxes becomes about 70 cents, and after a 15% dividend income tax, comes out to about 60 cents net to the shareholder. Apple currently earns 1-cent per year on that $1 of overseas cash (1%). In order to be better off, the shareholder would have to earn more than 1 cent on the 60 cents they receive after all taxes are paid. That equates to just a 2% annual return.

Although hedge fund manager David Einhorn took some heat for suggesting that Apple’s share price multiple would increase if the cash were used in a more shareholder-friendly way, it is hard to argue that the market is giving Apple credit for its vast cash hoard right now. The stock currently trades at around $435 per share. Net cash is likely to be around $160 per share as of March 31st, so you are paying $275 for the actual business. That business will earn $40 billion (over $40 per share) this year, more than any other U.S. company.

The idea that Apple should trade at a 7 P/E simply makes no sense. There are many reasons why it does today, and the fact that they have $150 billion stashed away earning 1% per year is a major reason why. I am buying more of the stock at current levels because I am betting this cannot go on forever. Just including the cash and using a 10 P/E (in-line with other large tech stocks) on the operating earnings of the business nets you a $600 price target for the shares (38% above current levels). Even though Apple’s management team has been completely dismissive so far, I still feel strongly that this is a bet worth making. And that is what I will be telling my clients in this quarter’s letter.

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

Best Section of Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders: Why Buybacks Are Preferred Over Dividends

This weekend I had the pleasure of reading Warren Buffett’s annual shareholder letter (an annual exercise for me) and I wanted to share a section of the 23 page document with my readers. In it, Buffett discusses why he prefers share buybacks over dividends (Berkshire has never paid a dividend). Not only did he present a clear and concise explanation, but I also think it sheds much light into the current debate at Apple, where shareholders are hoping that management there finally makes some wise capital allocation decisions, as the stock hits a new 52-week low today. I have created a PDF file consisting of just the 3 page section on dividends versus buybacks if you would like to read it.

Would David Einhorn’s Apple Preferred Stock Idea Really Create Shareholder Value?

This week hedge fund manager David Einhorn, whose investment management firm owns more than 1 million shares of Apple (AAPL) stock, publicly urged the company to take more meaningful action on its ever-rising cash hoard of $137 billion. Since management is not really taking the matter very seriously, despite the fact that every dime of that $137 billion belongs to the shareholders, Einhorn has proposed an alternative idea to unlock shareholder value; issuing preferred stock to existing shareholders, at no charge, with a 4% perpetual dividend.

His thinking revolves around the idea that Apple shares are not adequately valuing the cash on the company’s balance sheet, and issuing preferred stock would actually boost shareholder value because the new stock would have a quoted value in the market that investors could actually monetize if they chose to do so. Einhorn is saying that if implemented, Apple shares post-preferred issuance would be worth more than they are today (because he does not think Apple common stock would fall by $100, the value of the preferred given out). In addition, the 4% dividend on the preferred stock would increase the company’s dividend obligation by less than $4 billion per year, which would easily be covered by future free cash flow and not eat into the current $137 billion cash balance.

So does this plan have merit? I think it does, but I would agree with many who say that it is an overly complicated solution to a relatively simple problem. That said, if Apple is unwilling to take more traditional steps for the benefits of shareholders (after all, Tim Cook and his team work for us), then an idea like this is worth considering (to be fair, since a large portion of Apple’s cash is overseas, repatriation tax issues complicate their possible strategies quite a bit).

Interestingly, today I read a post by Aswath Damodaran, a well known finance professor at NYU, who argues that Einhorn’s idea would generate no shareholder value whatsoever. How he can make such a bold claim, to me, is quite odd. It is true that the idea right now is all theoretical, and there is not a way to know for sure how much the market would value Apple’s common and preferred shares if such an issuance was implemented, but Damodaran equivocally states that value can not be created out of thin air. Here is his exact quote:

“You cannot create value out of nothing and giving preferred stock to your common stockholders is a nothing act, as far as the value of the company is concerned.”

This concept is along the lines of something you are likely to find in a finance textbook. Damodaran would likely argue that a company is worth X, based on the discounted value of future expected cash flows, plan and simple, and slicing and dicing paper does nothing to change that.

I would respectively disagree for a fairly simple reason. I believe that something is worth what someone else is willing to pay. You have probably heard people say that a lot in a wide variety of contexts. For instance, if you are selling your house, just because it is appraised for “X” does not mean that is what it is “worth.” It is only worth the amount that a buyer is willing to pay you for it. Which is why real estate agents value their clients’ homes using “comps,” which are actual sale prices for comparable homes. Original asking prices, or appraised values, are not considered because they are not “real” prices.

The same is true of stocks. At any given time a share of stock is worth the market price, plain and simple. If Apple stock is trading at $470, as it is today, that is what you can sell it for. As a shareholder, that price represents its value to you. At that moment  you can either choose to own one share of Apple or $470 in cash. No other option exists.

Now, an analyst, or portfolio manager, or finance professor can do some number-crunching and conclude that they believe Apple should be worth more than $470 per share (in fact, both Professor Damodaran and I agree that Apple is a bargain currently), but just because someone believes that to be the case does not make it true. In order for our opinions to be proved right, the market has to price the stock at that level. That is the only way we could ever actually sell our stock for a higher price.

Investing in a stock is making a bet that its market value will be higher in the future, affording us the opportunity to sell our shares and make a profit. Professor Damodaran makes the philosophical argument that price and value are not the same, but I respectfully disagree. A share of stock is only worth what someone else is willing to pay and the price someone is willing to pay is the current market price.

So, back to the case of Apple. If the company took David Einhorn’s advice and gave investors $100 of preferred stock for free, for every share of Apple they owned, it is entirely possible that Apple common stock would trade above $370 (the current price less $100). We cannot prove that unless it actually happened, but it is a reasonable conclusion to draw based on Apple’s earnings power ($40 per common share in trailing EPS post-preferred issuance).

In fact, if Apple common shares fetched a 10 P/E, as Einhorn projects, the stock would be $400 and shareholders would then own $500 worth of Apple securities ($400 common plus $100 preferred). Considering that they can now only get $470 for their shares, there would indeed be $30 per share of “value creation” for shareholders. Again, Apple stock is only worth what someone is willing to pay. That amount is the current price. no more and no less. For anyone to argue that no value would have been created for investors in that scenario seems illogical. Price and value are one and the same because there is no guarantee that anyone will ever be willing to pay you what you perceive the value of something to be (how frequently that occurs will determine how good of an investor you are).

I remember reading about a line delivered by Donald Trump in 2007 when asked about his net worth. Here is the exchange:

Trump: My net worth fluctuates, and it goes up and down with the markets and with attitudes and with feelings, even my own feelings, but I try.

Ceresney: Let me just understand that a little. You said your net worth goes up and down based upon your own feelings?

Trump: Yes, even my own feelings, as to where the world is, where the world is going, and that can change rapidly from day to day …

Ceresney: When you publicly state a net worth number, what do you base that number on?

Trump: I would say it’s my general attitude at the time that the question may be asked. And as I say, it varies.

In this case Trump is using the same definition of value that Professor Damodaran seems to be using. Trump says his net worth is X. That is the perceived value, which is why he thinks it can be different based on how he “feels.” Of course, we know that net worth is a technical term. There is no perception involved. His net worth is the amount of money that would be left over if he were to sell all of his assets and repays all his debts. Plain and simple.

As for Apple, I am hopeful that Einhorn’s public challenge of Apple’s capital allocation policies kick-starts some changes at the company. There is no doubt in my mind, and many are in agreement, that the current market price of Apple is largely discounting the value of its massive $137 billion cash hoard. There is no other explanation as to why the stock current trades at a trailing P/E of only 7, especially when you compare it with other technology stocks.

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

Wow: Apple’s Round Trip Back Below $450 Brings Trailing P/E Down To 7x



That kind of looks like a mountain landscape I would see from higher elevations out here in Oregon, but instead it is a 1-year chart of Apple (AAPL) stock. After Tuesday’s solid but uninspiring fourth quarter earnings report, Apple’s quick fall from perceived market darling to “just another large cap tech stock that is being passed by on the innovation front” has reached a crescendo. The magnitude of the drop from the September high of $705 now sits at -37%. Instead of $800 price objectives, some are suggesting $300 may be more fitting. How times have changed in just four months.

Apple earned $44 per share last year, giving the stock (at the current $445 quote) a trailing P/E of 10x. Free cash flow in 2012 was $47 billion, giving the stock a 9x free cash flow multiple. The P/E is actually lower if you use free cash flow instead of reported earnings. That hardly ever happens and shows you just how cheap the shares are right now. And don’t forget the $137 billion ($145 per share) of cash that Apple has in the bank). Subtract out the cash position and investors are getting Apple’s operations for just $300 per share ($285 billion). That equates to a trailing P/E of 6.8x and 6.1x times last year’s free cash flow.

How do those numbers compare to others? The P/E is lower than Microsoft, Intel, Cisco, IBM, and Oracle. The free cash flow multiple is unheard of. Try finding any other company that trades at 6x free cash flow, in any industry!

Now, I did write about a month ago that I thought Apple stock was cheap at $525 (“Apple Shares Now Nearly As Cheap As Microsoft: Which Would You Rather Have?”) so it should come as no surprise that I think it’s super cheap at $445. The point is, even if you think both their growth and margins have peaked, it is not easy to justify the stock being at $445 or $300 net of cash. The business would have to decline meaningfully from here for that to make sense.

Sure, it’s not impossible, but is that the most likely outcome? Is it likely that Apple’s share of the tablet market declines meaningfully? Is it likely that their share of the smartphone market declines meaningfully? Remember, those end markets are growing, so just maintaining current market share results in Apple’s business growing, not declining from here. Is it likely that they never come out with any new products? A television? A lower cost tablet for the education market to replace expensive, heavy textbooks? A streaming radio competitor to Pandora? Something else that has not yet been rumored already (those three have)?

Yes, it is possible that nothing positive happens for Apple from here on out. That they have peaked and will graduate to “old tech” like Gateway, Dell, HP, Intel, or Microsoft. But that is what the stock is priced for right now. To me, that does not seem like the most likely outcome. And if some things start to get better, or if Apple’s 80,000 employees use their $137 billion of excess cash to create something new and great again, then the current stock price might look a little silly.

There is a difference between growth rates and profit margins peaking and massive deterioration in sales and profits. The stock has broken down technically, emotions are running high, analysts are slashing their price targets, and there are no catalysts to turn things around in the short term. But all of that could change fairly quickly. And given how cheap the stock is and how much money the company continues to print each day in its stores and on its web site, I just don’t think fair value on Apple is a 7 trailing P/E multiple.

But we will just have to wait and see. I am willing to wait this out and will likely selectively add to client positions in the stock.

Full Disclosure: Long shares of Apple, but positions may change at any time.

Netflix Stock Repricing Overdone

Netflix (NFLX) stock is soaring this morning, up 36% ($37) to $140 per share in pre-market trading. The company’s fourth quarter financial results were above expectations, but at first glance do not appear to warrant a 36% stock price increase. Revenue rose 7.9% year-over-year, leading to a very small quarterly profit of 13 cents per share.

Investors are enthusiastic about Netflix’s addition of 2.05 million domestic streaming customers (up 8.2% versus the prior quarter), but that figure is a bit misleading as actual paid customers rose by just 1.67 million (+7.0%). Obviously, lots of free trial memberships are given out at the holidays, but how many of them convert to paying customers is a big question mark.

It was also a good sign to see operating earnings from the domestic streaming segment rise to $109 million in Q4, versus just $52 million a year ago. The DVD mail segment earned $128 million domestically for the quarter, which just goes to show you how much more profitable those subscribers are. The DVD mail business earned more money, despite having just 8.05 million paid subs, versus 25.5 million paid streaming subs.

Netflix continues to see subscriber losses in its most profitable segment and gains in a streaming business that has very high operating costs. Just how valuable a streaming customer actually is will remain an important issue for investors. Based on the stock’s rise this morning, you would think streaming customers mint money for the company. Conversely, Netflix reported segment profits of $4.25 per paid subscriber during the fourth quarter. That comes out to less than $1.50 per month in profit from the $8.00 per month in revenue they generate.

Back in August, with the stock floundering in the mid 50’s, I wrote an article on Seeking Alpha entitled “Netflix Is Finally Cheap.” I did not buy the stock, which in hindsight was a mistake since the analysis was correct. With the stock around $140 as I write this post, I can not justify an equity valuation of $8.25 billion for the company, so if you have played this stock correctly lately, you might want to strongly consider lightening up on your long position into today’s strength.

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

Dell LBO: A Logical Move That Others Might Mimic

Investors have been speculating for a couple of years now that Michael Dell could eventually take his computer company private, after leaving the option on the table in multiple press interviews. His large stake as founder and CEO (about 15% of the company) coupled with his transformation plan and lack of respect on Wall Street (for the stock, not himself) all make a leveraged buyout seem logical. With news that a deal is being negotiated and could be finalized shortly in the $13-$14 per share range, I think the deal makes a lot of sense and others might take Dell’s lead and follow suit.

All of the ingredients required for a successful LBO are there in Dell’s case. The stock is so unloved on Wall Street that even after a premium is attached to the shares (which were hovering around $10 before news of the deal discussions leaked) the company can be had for a very attractive price. The company generates about $4 billion of cash flow annually, with $3.5 billion or so left over after capital expenditures. With a market value of around $23 billion, which excludes $6 billion of net cash on the balance sheet, Dell and his group would be paying about 4 times EBITDA.

Bears on the stock will be quick to point out that Dell still gets the majority of its revenue from desktop and laptop computer sales and that business is in decline thanks to the emergence of powerful smartphones and tablets. Indeed, that is why the stock has been pressured lately and accounts for the meager enterprise value assigned by the public market, but it also ignores the transformation plan that Dell and his team have slowly been implementing. While PC deterioration is offsetting the financial benefits of the company’s move into the corporate world of servers, storage, security, and services right now, over time that side of the business (which is both Dell’s current focus and future) will overtake the PC side and allow the company to continue to book strong profits. Once PCs dwindle to 20-25% of the business over the next several years, Dell can re-IPO and the LBO investors can cash out big time. At that time, Dell will look more like IBM than HP.

So why might other companies seen as “old tech” go down a similar route as Dell? First, it makes it a lot easier after someone else does it first, as it gives credibility to the idea. Companies heavy into PC-related businesses are not going to get respect from Wall Street going forward. Dell’s pre-deal P/E ratio of 6x proves that. After a while, the frustration mounts and staying public loses its luster. Hewlett Packard is likely going through a similar thought process right now, even though they are far behind Dell in orchestrating a solid transitional game plan. Even PC-related software companies like Symantec are being painted with the same brush and could explore the idea of going private. Anti-virus software is simply seen as yesterday’s technology and lacking growth potential.

All in all, this Dell LBO idea makes a lot of sense on multiple fronts, and while other companies might not have as many strong cards to play to make a deal like this work, I bet a finalized Dell deal prompts a lot of discussions in board of directors’ meetings across the industry in coming months.

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

Apple Shares Now Nearly As Cheap As Microsoft: Which Would You Rather Have?

That’s right. With the recent share price plunge in Apple (AAPL), from over $700 to around $525, the stock is rapidly approaching the valuation of 1990’s tech darling Microsoft (MSFT). While clearly facing near-term headwinds, both on the product side (a narrowing of their technological lead over rivals) and the financial side (fiscal cliff, tax-related selling before year-end), among others, I find it hard to make an argument for why Apple should not trade at a premium to Mister Softee. To be fair, Apple still fetches slightly more if you go out to one decimal place, with AAPL trading at 6.4 trailing cash flow, versus 5.7 times for Microsoft. If Apple shares fell another 8% or so, to around $485, and MSFT stayed around $27, both would trade at 5.7x trailing 12 month EBITDA. Still, investors are having a hard time understanding exactly how sentiment on Apple has shifted so much in just a few short months.

Now I know many people come to this blog to discover new investment ideas, and Apple definitely does not qualify. However, since contrarian investing is one of my core tenets, I think it is important to point out that Apple shares are dirt cheap right now. In order to justify a lower stock price, say one or two years from now, you have to think that Apple’s sales and earnings have peaked and are headed down from here. While that is not an impossibility, especially in the world of technology, I think it is far more likely that Apple’s market share gains slow and level off going forward. Even in that case, the end markets they serve as going to grow nicely over the next few years. As a result, I don’t envision their financials petering out from here, though for a company of this size, the hey days of rapid growth are clearly over.

For those who aren’t sure such prognostications will prove true, consider again the comparison with Microsoft. Regardless of Apple’s position relative to Google, Samsung, and the like in the coming years, is Microsoft really as well positioned? I don’t think so. Even a bet that Apple will outperform Microsoft, given their stocks are nearly identically priced, is a bet investors can make in the public market by shorting one and using the proceeds to go long the other. iPod versus Zune? iPad versus Surface? iPhone vs Windows Phone? It’s not a bad play.

Although discussing large cap tech titans like AAPL and MSFT hardly uncovers anything new for curious investors, I definitely think today’s share price on Apple is worthy of discussion. The recent 200 point decline seems very overdone to me, based on what is happening out in the tech marketplace. The last time I updated my fair value for Apple stock I got a number with a “7” handle on it. Nothing has changed since then, and for the first time in a long time, I am actually looking to add to the stock in client portfolios.

Full Disclosure: Long Apple and no position in Microsoft at the time of writing, but positions may change at any time

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