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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

April 15, 2013 - Searching for Internet Stability

Yahoo is one of the largest Internet companies out there and has a host of properties across the net. Yahoo is divided into three main groups: Communications and Communities; Search and Marketplace; and Media. The company operates Yahoo Mail, Yahoo Messenger, Yahoo Groups, Flickr, Yahoo Small Business, Yahoo Finance, and many other business segments. Whether you realize it or not, if you are a regular Internet user, you are likely using Yahoo's services in one way or another every day. Yahoo is not just a US company; it also has taken services overseas with strategic partnerships in Japan, China and other locations.

While broad and diverse, the company has had stiff competition over the last few years from Google and other companies. Yahoo has had seven different CEO's over the last seven years since its founders left. Current CEO Marissa Mayer is the youngest CEO of a fortune 500 company and comes from Google where she was a long-time spokesperson.  Being a young woman CEO might scare some people, but she started at Google as employee number 20 and had a significant impact on the success there. She is expected to emphasize technology, innovation, product quality and mobile applications as leader of the company. Being young in a high tech area is an asset, and she may have the vision to refocus the company on a limited number of profitable divisions. Mayer recently came under fire after she took time off for having a child just before eliminating Yahoo's liberal work at home policy in order to tighten focus at the company. There were fears that employees at home were not productive enough.

Online advertising has been growing as more people spend more time online. In 2010, total advertising online grew 15% and in 2011 it grew 22%. Analysts expect that it grew about 12% in 2012 and will grow another 10% in 2013.  This is good for Yahoo which gets a lot of revenue from ads and placement. The company has some strategic alliances with Microsoft's Bing and Google in ad placements.

Yahoo is set to report earnings after the market close on April 16, 2013. Analysts expect the stock will report $0.24 per share, beating last year's $0.23. In the last quarter, the company reported $0.32, beating estimates of $0.28 and the prior year's $0.24. Earnings generally have been on an uptrend since slowing in the recession of 2008.

Take a look at a covered call on Yahoo. One may want to look for an at-the-money covered call about three months out. Certainly, there are some other choices on the option chain that will give a decent return, but the Yahoo July 23 covered call at a 21.75 net debit caught our attention.  The buy-write trade has 5% assigned return rate and 6% of downside protection. With this trade only open for three months the 5% return if annualized (for comparisons purposes only) is a 21% return. In order to pull in the full return, the stock needs to expire above 23 in July. You will make money as long as it expires above 21.75, the entry price. Just before expiration, one may want to look at the trade and consider rolling it out for more cash.  While Yahoo is stable, growth over the last few years has been comparatively slow, so using a covered call to pick up extra cash makes a lot of sense. Yahoo does not pay dividends at this time. With a new CEO at the helm, Yahoo's portfolio of cash producing Internet properties should continue to make money. 

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