Y H & C Investments BLog
The blog is a personal commentary by Yale Bock on the specific events which may have occurred in the investment or political world. Specific stocks are mentioned, and many readers find this a good way to gain another perspective on the investment world.
In a typical mid-summer August week, the average family enjoys their vacation in some lovely area of the world, usually with sun, sand, and suds. In the capital markets, earning reports, geopolitical events, and light volumes have and continue to be the daily routine for most participants. One of the interesting situations, which only recently has thrown a small hiccup into how investors see things, is the outflow of capital from the high yield market. Some companies have even taken new bond deals off the table because of the inability to get them completed at acceptable terms.
It is good for equity investors to pay attention to the high yield bond market for quite a few reasons, especially with entities who have, or potentially may have, merger and acquisition possibilities related to financing deals. With capital moving out of the high yield arena, primarily because of the lack of a yield premium versus the supposedly safer treasury bond, some are wondering whether this is the start of a long anticipated movement of big money avoiding fixed income and being allocated to other areas. What throws a wrench into that idea is the continuing strength of the treasury market, with the ten year bond yield now sitting at 2.35%. When you add in the variability of earnings results, the unpredictability of geopolitical events, and the volatile psychology in the investment world, trying to predict what might happen on the macro side remains very much a fool's errand.
Earnings reports were a focus this week as Cisco reported a good number but guided down, which was also the case for Wal-Mart. In a bit of a surprise, JC Penny's posted nice results and Macy's did the same, but also warned about the rest of the year. SeaWorld, the big theme park operator, absolutely got crushed because of lackluster attendance figures, which have to be somewhat attributed to the poor publicity it received from a documentary on the sub-standard treatment of it's whales. Another company which really suffered was Vringo, which had it's stock drop, hold on to your hats now, by 72% when a Federal Appeals court overturned a previous decision related to it's patent disputes with a number of large companies like Google and IAC Interactive.
The patent troll space is an interesting one because it involves the intersection of technology and law, and because it is very lucrative. The biggest caveat for investors are these kinds of legal decisions because if you own the stock of a company which has a business model based on patent lawsuits, or using the threat for licensing deals, and it loses a large case, the equity just gets decimated. Speaking with, shall we say, some familiarity on the industry, it remains a very interesting area and should remain so for quite some time.
On the deal front, Coca-Cola announced a minority position in Monster Beverage, the second largest participant in the energy beverage industry. Coke is looking for growth and Monster gets access to the best distribution network on the planet. There was some shuffling of assets included in the deal as well, and I would expect this to be a win win situation for both companies for a long time.
Marissa Meyer should do lunch with John Malone. Not for any social reason mind you, no, but for some advice on how to proceed with it's Alibaba transaction. You see, Yahoo holds a 22.5% stake in Alibaba, which will have it's long rumored IPO in the next month. Conventional thinking has the massive chinese internet company being valued at anywhere from $125 billion to $200 billion, so Yahoo's stake is worth in the range of 25-40 billion. Yahoo has said stated publicly it will sell about a quarter of the position, or in the neighborhood of 140 million shares ( http://bit.ly/1t8fnn6). In doing so, it will incur capital gains taxes of anywhere from $10-20 billion.
Malone, as we all famously know, hates tax leakage. So, during a nice meal at a luxurious location of Mrs. Meyer's choice, somewhere like the Four Seasons, our friend Mr. Malone might suggest another way of monetizing the stake. His advice should be strongly considered as if ever there was a person who knows how to hedge an enormous large capital gain, it is Liberty's Chairman of the Board. His advice would be for Yahoo to issue convertible debt against the Alibaba position, and have the maturity date be as far into the future as you could make it. In doing so, Yahoo would have the same access to the large amount of cash the Alibaba stake will be worth, and it will get to use the deduction on the interest due for tax purposes. It could still pay shareholders a big dividend, and have plenty to spare to make plenty of acquisitions in the mobile space. Just as importantly, it would retain the Alibaba stake for its own flexibility without having to sell and pay a huge tax bill.
Many investors, including myself, believe Yahoo is clearly cheap given the enormity of its assets versus its market price (full disclosure- Y H& C Investments owns it for clients). Eric Jackson has long railed against the decision making of Marissa Meyer, and some of it for good reason as to pay a massive tax bill without examining other alternatives would be sacriligious from Malone's point of view. Indeed, he employed this same transaction in currently hedging a large stake in the Home Shopping Network. If you are interested in Mr. Jackson's thoughts on the matter, you might look at this article as well. Usually, lunch dates are the responsibility of the gentleman but in this case, I would pick up the tab if I were Marissa.
Thank you for reading the blog this week, and I hope you have a good rest of the summer. There will be no blog next week as it is time for a little r and r.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.