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My Best Call for 2013: Yahoo!

Eric Jackson

NEW YORK (TheStreet) -- Going into 2013, my highest conviction idea was Yahoo!! . It worked out very well. The stock is up 101% for the year to date.

At the start of the year, it wasn't an entirely obvious play. Going into 2013, Yahoo! was trading around $20 -- up from $14 when Marissa Mayer was hired as CEO six months earlier and up from $11 about 18 months before when activist investor Dan Loeb first built a position in the company.

There were many market observers who said the "easy money had been made" in Yahoo!.

Then, midway through the year, Dan Loeb surprised everyone by leaving the Yahoo! board and reduced the size of his position in the company by two-thirds when the stock price was $29. The howls from observers was that anyone else holding Yahoo!'s stock was "dumb money." These observers instructed people to immediately sell Yahoo! or risk being a bag holder. It turned out to be laughably bad advice.

Through it all, I suggested that you should stay long Yahoo!. Why?

Ever since I first went long on the stock three years ago I noticed most market observers, when they looked at Yahoo!, only considered the "core business." No one seemed to pay much attention to the Asian assets -- Yahoo!'s investments in Yahoo! Japan and Alibaba.

Because of this bias towards the American part of Yahoo!, most observers tended to think the stock was destined for failure.

I recall meeting in mid-2012 with a portfolio manager who was well respected at the time and explained my thesis on why I liked Yahoo! stock. He cut me off 30 seconds in, saying, "Yahoo!? Are you kidding me? Yahoo!'s a dinosaur. I haven't been on the site in like 10 years."

The only time investors started to pay a little bit of attention to the Alibaba part of Yahoo! was in the beginning of 2012. No less a respected investor than David Einhorn of Greenlight Capital announced in early 2012 that his firm had taken a position in the company. He highlighted that he thought it was under-valued with the promise of Alibaba. The stock quickly rose on this vote of confidence to $18.

Unfortunately, in May 2012, Jack Ma announced he was removing Alipay as one of the companies in the Alibaba Group. He claimed it was demanded of him by the Chinese government. American investors interpreted it as a sign the entire Alibaba investment (as well as investment in Yahoo! Japan) should be discounted to zero. Einhorn announced a month later that his firm had sold his entire position in Yahoo! because the Ma drama was "not what we signed up for."

Yahoo! shares slumped over the summer of 2012 to as low as $11. I recall pitching Yahoo! at that time to one of the premier activist investment firms at the time. "Everyone and his brother has pitched me on Yahoo!. This idea is old news. The only way I'd invest in Yahoo! right now," announced a cocksure Managing Partner to me in his board room, " is if Jack Ma put a billion dollars in trust which I could access if he ever pulled a stunt like Alipay again."

My point is there were lots of seeming bright and accomplished professional money managers who got Yahoo! completely wrong. It was no sure thing when Dan Loeb got involved in August 2011 and it wasn't at the start of this year.

So why did I stay with it?

Well, partly it was I knew there was a strong bias that most investors had to the core business. That business does matter and it can certainly help the stock if it turns around. However, I always had the view that part of the business will move only about 15% to 25% of the stock price.

The real value was always Alibaba and to a lesser extent Yahoo! Japan. There was a bet I made that Jack Ma was not going to void Yahoo!'s investment in Alibaba. If he did that, he'd also have to void Masayoshi Son's investment in Alibaba from SoftBank. Those are powerful people to make your enemies.

Jack Ma is also a man who values his international reputation and had plans to expand Alibaba internationally. There was no way he could jeopardize that by becoming an international pariah.

So, after making a bet on Alibaba remaining part of Yahoo!'s assets, it became a question of waiting for the market to catch up with its growing value. At the start of 2013, there were still many who believed Alibaba was worth $35 billion because that was the value done at a private equity investment in September 2011.

As we close the year, there's one analyst who now says Alibaba is going to be worth $250 billion. What a difference a year makes.

Yahoo! Japan doubled in value this year, too, thanks to "Abe-nomics." That also made U.S. investors place a greater value on it.

As the value of Yahoo!'s stock kept going up this year, critics kept complaining that Yahoo!'s core business hadn't really improved and CEO Mayer didn't deserve the credit for the bump in shares.

In my view, this point is irrelevant. All that matters is where the stock is going.

Looking to 2014, there's still a lot of upside in Yahoo! left, in my view. Alibaba still has a lot more to go up. I could also see Yahoo! Japan rising considerably this year. The Yahoo! core might finally surprise this year. There are also a few remaining financial bag of tricks that Yahoo! could execute to help the stock this year, including buying back a lot of stock and finally pulling the trigger on a cash-rich split.

Even with no turnaround in the core business, I could see Yahoo!'s shares reaching $60 by the end of the year. Right not they're around $40.

If I had to say the biggest lesson I've learned about getting into Yahoo! early and sticking with it throughout this year, it's this:

In this era of over-trading and paying attention to the minute, day-to-day moves of stocks, the wisest thing to do is just leave a trade alone when you have conviction about a company, and then ride it all the way to its fruition.

At the time of publication the author was long YHOO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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