John Burbank’s Passport Capital Is Another Yelp Bull

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Passport Capital, a hedge fund managed by John Burbank, has reported a position of 1.1 million shares in Yelp (NYSE: YELP), which makes for 6.3% of the outstanding shares of the business reviews website. Our database of 13F filings shows that the fund did not own any shares at the end of the third quarter of 2012. Earlier this year we looked at Passport’s investment philosophy and process (Learn more about how Burbank and his team invest and see what stocks it did own at the end of September). We track hedge fund filings to stay up to date on what these investors are doing, as well as to help us develop investment strategies; the most popular small cap picks among hedge funds, listed in our August newsletter, outperformed the market by 18 percentage points between September and January (read more about our hedge fund strategies).

Yelp has become something of a battleground stock. On the one hand, we’ve reported on several hedge funds taking significant stakes in the company; just two weeks ago, Robert Karr’s Joho Capital reported that it had increased its own holdings to almost 6% of the outstanding shares. Steadfast Capital Management has also been a major shareholder in the company. On the other hand, over 60% of the outstanding shares are held short and we would note that our records of insider trades include a number of insider sales in the past few months, including three different insiders selling over $100,000 in stock in January 2013. Insider sales generally aren’t as informative as insider purchases since selling shares can be rational, but it can be a factor to take note of.

In its most recent quarter, Yelp reported a small loss, which isn’t good for a company with a market capitalization of more than $1 billion, though its revenue did increase by 63% from its levels in the third quarter of 2011. Wall Street analyst expectations are for a small profit this year, resulting in a very high current-year P/E, though as with many other websites the presumption is that at some point Yelp will develop a monetization strategy that will leave it with high earnings growth. Of course, another potential investment thesis is that Yelp would be acquired by another Internet company. Still, we don’t think that the stock is a buy right now.

We can compare Yelp to Facebook (NASDAQ: FB), which is developing its Social Graph partly as a way for users to find local businesses their friends like; Google (NASDAQ: GOOG)Groupon (NASDAQ: GRPN), whose local deals offer an alternative source of marketing for local businesses; and OpenTable (NASDAQ: OPEN). Google, as the most established company out of this peer group, trades at 14 times forward earnings estimates. That figure is based on expected earnings growth from both the search business and from improvements in integrating Motorola Mobility Holdings, so investors should not take it quite at face value though there is certainly potential for improvement on both fronts.

Facebook’s forward P/E is 36; again, this is based on consensus of high earnings growth and so we would be cautious. We also haven’t been particularly impressed with Social Graph; while it has some prospects, it’s not enough to justify a valuation of $30 per share. Groupon and OpenTable are similar situations, though in those cases nobody is looking for a monetization strategy: improvements in these businesses this year, which would still place their earnings multiples in the 20s, are supposed to come from their current revenue-generating offerings continuing to grow enough to carry net income higher. We think that investors should avoid both of these stocks, as Groupon is actually currently struggling with profitability, and there have been some concerns that OpenTable, while it’s certainly a valuable service, may have trouble winning over marginal customers. We’d note that they are also both popular short targets. 


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in GOOG. The Motley Fool recommends Facebook, Google, and OpenTable. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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