Hedge Fund Steadfast Owns Over 5% of This Internet Stock

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In October, we reported that Robert Pitts’ Steadfast Capital Management had acquired over 5% of the outstanding shares of Yelp (NYSE: YELP) according to a 13G filed with the SEC. By the end of December, however, the fund had reduced its stake back down to below 600,000 shares according to its 13F filing for the fourth quarter of 2012. The stock is up 21% year to date, however, and the fund appears to have been buying back in recently: it recently owned 1.3 million shares of Yelp according to a new 13G, giving it 5.4% of the company (though we don’t know when in Q1 Steadfast bought these shares).

Yelp continued its history of unprofitability in 2012, losing 35 cents per share despite a 31% increase in unique visitors and a 65% increase in revenue. With some of the increase in expenses being share-based compensation, cash flow from operations was only slightly negative (though it had been positive in 2011). Wall Street analysts believe that this will be a better but still unprofitable year for Yelp, with forecasts calling for losses per share of 5 cents; for 2014, EPS estimates rise to 20 cents.

Even if we assume that the company does manage to convert its operational and top-line improvements into that kind of profitability, that is still a high forward P/E, and the most recent data shows that over 60% of the outstanding shares are held short. We would note--for any potential shorts--that some Yelp bulls speculate that Google (NASDAQ: GOOG) or another company might acquire Yelp though no hard evidence of a move like that exists.

Since Yelp is a small cap stock, we think that it’s particularly important to take note of hedge fund moves; our research shows that the most popular small cap stocks among hedge funds, as determined by 13F filings, outperform the S&P 500 by 18 percentage points per year on average. Our database of filings shows no fund with over $20 million invested in the stock as of the beginning of January. However, earlier this year we did see John Burbank’s Passport Capital and Tiger Cub Robert Karr’s Joho Capital reporting ownership of over 5% of the company.

Yelp’s peers include Google and Facebook (NASDAQ: FB), whose Social Graph may be used partly as a way for users to find local businesses that their friends (or friends of friends) have used and liked. We can also compare Yelp to Groupon (NASDAQ: GRPN), an alternative source of marketing services for local businesses, and to OpenTable (NASDAQ: OPEN), which offers restaurant reviews as well as reservation services.

Google may be on the most solid valuation grounds of the lot: its trailing P/E is 25, but it has very real earnings growth prospects in its search business as well as potential gains from further integration of its Motorola acquisition. Groupon, like Yelp, has been unprofitable recently, and even though analysts are expecting improvement at that company as well its forward earnings multiple is 20. While the stock has rallied recently following the exit of its CEO, it’s not clear to us that the core business has actually improved.

Facebook and OpenTable are likely to experience growth in net income over the next few years as well, but in the case of those companies we would worry that their current valuation already accounts for all of this growth and more. Facebook trades at 33 times forward earnings estimates, while OpenTable’s forward P/E is 27. Those projections are based on assumptions of significant growth; OpenTable’s numbers have actually not been that good recently and Facebook, while revenue was up 40% last quarter compared to the fourth quarter of 2011, has not done as well in terms of its bottom line so we would need to see better results from the company before considering it as a potential growth stock. 


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Google. 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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