Billionaire Steve Cohen’s SAC Reports 5.2% Stake in 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.

A 13G filed with the SEC has reported that billionaire Steve Cohen’s SAC Capital Advisors owns 2.6 million shares of WebMD Health (NASDAQ: WBMD), giving it 5.2% of the total shares outstanding of the $1.5 billion market cap health information website. At Insider Monkey, we can see from our database of 13F filings (which we track as part of our research on investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) that SAC had only about 90,000 shares of WebMD in its portfolio at the end of March (see more stocks SAC owned).

Taking a look at the company

WebMD’s revenue grew 5% in its last quarter compared to the first quarter of 2012, with the company attributing much of this growth to advertising revenue on its public portals. While costs were still high enough that the business experienced a net loss, this loss was much lower than it had been in the prior year period. In addition, WebMD generally considers its business to be seasonally weaker earlier in the year due to trends in advertising. The company recently raised its guidance for Q2 and now expects to have earned $0.05 per share for the quarter rather than a small net loss; this would be the first profitable quarter for WebMD in terms of adjusted earnings for some time.

The stock’s valuation, however, already assumes significant improvements in the business in the future. Current consensus is for $0.22 in earnings per share this year, which would mean an average of $0.10 of EPS for each of the next two quarters. Then, WebMD is expected to earn $0.36 per share for 2014, and even if the company hits its target, that results in a very high forward earnings multiple. That seems like an aggressive market price for a business dependent on advertising revenue. Billionaire Carl Icahn is another major investor in WebMD, with his group’s 13F reporting a position of 6.7 million shares (find Icahn's favorite stocks).

Comparing WebMD to similar stocks

It’s most relevant to compare WebMD to other online sources of on-demand information. These would include Yelp (NYSE: YELP), Angie’s List, Bankrate (NYSE: RATE), and TripAdvisor (NASDAQ: TRIP).

Yelp and Angie’s List are also unprofitable on a trailing basis, and like WebMD, while the sell-side is predicting that they will soon break into the black, earnings are still expected to be quite low in 2014 relative to their current valuations. As a result, each is a popular short target: 16% of Yelp’s float is held short, and the same figure is 30% for Angie’s List. Yelp has been growing its business quite rapidly, with revenue up 69% in the first quarter of 2013 versus a year earlier, though adjusted EPS has actually been falling on a q/q basis. Angie’s List has seen its stock price rise over 80% in the last year, as it too has been seeing revenue growth of close to 70%.

Bankrate and TripAdvisor are at least profitable, though they too are highly dependent on improving their businesses in the future: their respective forward earnings multiples (which themselves incorporate expectations of significant EPS growth next year) are 24 and 28, respectively. Investors should note that Bankrate actually experienced double-digit percentage declines on both top and bottom lines in its most recent quarterly report compared to the same period in the previous fiscal year, which should prevent anyone from buying it as a potential growth stock for now.

The online travel industry has been experiencing high growth recently, and TripAdvisor is no exception with revenue and profit growth of 25% or higher. However, its trailing P/E of 42 represents a premium to those industry peers more focused on reservations and so, it might be worth looking into those stocks instead.

Conclusion

Markets are being quite aggressive -- probably even speculative -- in their valuations for WebMD and for many of its peers. It’s good that the company apparently turned a profit last quarter, but even analyst forecasts set a high bar for further improvement and a stock with a forward P/E of over 80 shouldn’t be that attractive, even if Cohen and his team like the stock. A similar logic holds for Yelp and Angie’s List, and as has been discussed, Bankrate has not been doing well recently and TripAdvisor doesn’t seem that appealing compared to other travel-related companies.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of TripAdvisor. 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!

blog comments powered by Disqus