Wyatt Research Week in Review: Nov. 29-Dec. 5

What to do about Yahoo (NASDAQ: YHOO)?
For months the media buzz centered on whether the fading Sunnyvale, Calif.-based Internet company would spin off its 15% stake in Chinese e-commerce giant Alibaba Group (NYSE: BABA). Now the talk is that Yahoo will instead attempt to sell its core business, which includes such Web properties as Yahoo Mail and Yahoo News.
The delay on the proposed Alibaba spinoff has hinged on taxes. Yahoo sought the blessing of the Internal Revenue Service that the spinoff would qualify as a tax-exempt transaction. On Sept. 8, the IRS declined to issue a favorable private letter ruling, leaving Yahoo – and by extension, Yahoo shareholders – potentially on the hook for $7 billion worth of taxes.
Yet Yahoo soldiered on with the spinoff plan, despite pressure from activist investor Starboard Value LP to keep the Alibaba stake and dump its core Web business.
It seems the pressure was too great on Yahoo and embattled CEO Marissa Mayer, whom Wyatt Research contributor Rebecca Bowden on Monday suggested could be on the hot seat.
On Tuesday, it was reported that the Yahoo board is considering acquiescing to Starboard’s proposal to abandon the Alibaba spinoff.
The tax implications of the potential spinoff are complicated. BloombergView put together this distilled chart of Yahoo’s assets:

Source: Bloomberg

There are a lot of line items missing, but in basic terms, the left-hand column indicates that the appreciated values of Yahoo’s Alibaba and Yahoo Japan stakes make Yahoo’s core business worth less than nothing – around negative $13 billion.
If a spinoff of Alibaba and Yahoo Japan were to come to fruition, Yahoo’s core business would be worth $1.7 billion, according to Bloomberg. Citigroup analyst Mark May has estimated that a fairer valuation of the assets is between $3.4 billion and $4.1 billion. A $4 billion price tag is a lot of money for an average Joe like you or me, but it’s chump change in the world of Googles and Apples.
Yet for me, the whole Yahoo to-do boils down to a basic crisis of identity.

What Is Yahoo, Exactly?

I established my first ever email account through Yahoo Mail back in 2000. In those days, the main Yahoo.com page was a pretty good news aggregator. It was far from comprehensive, but for a high-level view of big stories it linked to the major news outlets and gave the uninitiated Web surfer a decent source of information.
Check Yahoo.com these days and you’re bombarded with an endless stream of clickbait. Ads are indistinguishable from news. Tensions between Russia and Turkey are given equal weight to what Kim Kardashian wore to breakfast. It’s the National Enquirer meets the Associated Press, but without the unabashed sensationalism of the former or the journalistic credibility of the latter.
Granted, Yahoo Finance is an excellent resource. I prefer it to Google Finance, particularly its method of calculating dividend yields. But Google’s search algorithm – and thus its advertising reach – is so far superior to any other search engine that even Yahoo’s 2009 deal with Microsoft (NASDAQ: MSFT) to be “Powered by Bing” has had little impact on Yahoo’s revenues.
In 2012, when Mayer took the Yahoo reins, sales totaled $4.5 billion. In 2014, they clocked in at $4.4 billion.
Even if Yahoo manages to save face by either skirting the ire of the IRS on an Alibaba spinoff or unloading its moribund core Web assets, Mayer should start beefing up her résumé.
Here are some of my favorite Wyatt Investment Research articles of the week:
Top 5 Dividend Increases for December – December is upon us and there’s another robust list of companies paying dividends. But investors should focus more on stocks that are consistently upping their dividends, rather than just focusing on the dividend yield. A stock offering an 8% dividend yield is often the result of a depressed share price – which could fall even further, resulting in a dividend cut. Wyatt Research analyst Marshall Hargrave swam through the dividend pool and surfaced five buoyant dividend stocks paying investors more in December.
Will the Indian Smartphone Market Become Core to Apple? – With only 1.7 million iPhones sold in India in its latest fiscal year, Apple (NASDAQ: AAPL) badly lags the leaders in the Indian smartphone market. At an astonishing 18th in Indian smartphone sales, it represents a minuscule 0.9% of the market. But in Apple’s latest earnings conference call, CEO Tim Cook said he was “impressed with our progress” in India. Could India be the next China for Apple?
As a Contrarian Investor, It’s Hard to Pass Up This Opportunity – Bargains abound these days – and not just the Black Friday and Cyber Monday variety. There’s also a bargain basement opportunity in a beaten-down sector that investors – particularly those who lean toward a contrarian point of view – should take seriously.
The Best Commodity Play Today – Two billionaire hedge fund managers see big upside in an embattled commodity stock, which has seen its share price fall 40% over the last year. Despite the sinking share price, the company’s margins are still above its major peers. And at just over 6 times forward EV/EBITDA, it’s the cheapest we’ve seen the stock in close to five years.
Top 5 Bad Investing Habits Every Investor Needs to Break – If you’re looking for a New Year’s resolution, resolving to break any of these investing habits wouldn’t be a bad place to start.
Should Investors Copy Carl Icahn’s Xerox Strategy? – Activist investor Carl Icahn recently disclosed a 7.1% stake in Xerox (NYSE: XRX), making him the second-largest shareholder in a stock that has lost 25% year-to-date. It’s likely Icahn will push the company to consider a wide range of strategic options like a spinoff or outright sale. But the fact that the company has suffered declining revenue over the past five years – during a significant economic recovery – is a major concern.
December Could Be a Big Month for These Small Caps – Believe it or not, December is the best time of year for stocks. During the month of December, stocks have managed to post positive returns in 18 of the last 20 years. The small-cap space has really shined, however. The Russell 2000 small-cap index has gained an average of 5.6% over the past 20 years during the month of December. And with a likely Federal Reserve interest rate hike later this month primed to further strengthen the dollar, these three small caps – which generate little income outside the U.S. – should be beneficiaries.
5 Smart Year-End Tax Moves to Make Now – The best time for investors to make tax moves is at the end of the year. By year’s end, investors have a clear picture of investment decisions made during the current year and a good idea of their personal finances in the coming year. Here are five tax moves to consider making before the calendar turns to 2016.
Have a great weekend!