My Trading > My Trading Journal > September 13, 2015

My Trading Journal

September 13, 2015

6:00 pm (PST)

A possibly great opportunity presents itself with Yandex - a Russian internet stock. The stock is down about 75% from its 2-year high. If the stock recovers to only its 52-week highs, it is an easy double. That's the quick story. So lets look deeper at the valuation and other factors.

The Fundamentals

The earnings estimates are about $0.56 and $0.68 for this year and next. Here is a link to the Yahoo Finance estimates. They are stated in Rubles. You can do a currency conversion here with Bloomberg.

The growth rate is 17%. If we apply a multiple of 17 to the $0.68 earnings estimate for the soon-to-be-here year, we come up with a valuation of $11.50. If we add in the $1 net cash on the balance sheet we come up with $12.50. Although this is a little higher than the current price, it is not much higher. This is very surprising, given that the stock was so much higher before. Next, I looked to see if the estimates had come down by a lot. But they didn't. Next, I looked to see if earnings were much higher in previous years. But they weren't. The last thing I checked is to see if the company had a higher rate of free cash flow than earnings, which is common for high-tech companies. But they didn't. Any one of these factors would have pointed to a situation where I could assign the stock had a better valuation (if the FCF was higher), or expect the valuation would improve in the future (if the earnings were expected to rebound). But neither is the case here. From a mathematical standpoint, this implies that the stock was simply very overvalued in the past, and is now only fairly valued, despite the huge drop - unless I was missing something. Which I was. The value of the ruble had dropped in half over the past 2 years, so the fair value would be $25 if the Ruble had its value from 2 years ago...

The Ruble

The Ruble is down because the Russian economy is suffering. And the Russian economy is suffering because the price of oil has been dropping. So, the outlook for the Ruble will generally be tied to oil. What's my outlook on oil? Well, it is basically neutral. It could take a decent jump up by $10-$20 against the universal trend of bearishness. It could drop another $10-$20 to $20-$30. Or it could trade sideways.

The Technical Picture

The stock is down a lot and oversold. It is probably due for a short-term bounce, long-term trends aside. Here is a chart:

Bottom Line

I am holding off on buying Yandex. This says a lot since I am not afraid at all to buy a stock when things look very ugly. But in this case there are 2 main reasons.

The first is valuation. When I first saw that YNDX was down near 11, I thought it would be very undervalued. But it isn't. Then, I thought I could find a reason for the valuation to be compelling in the future. But I couldn't find a substantial reason.

The second reason is that there are simply too many factors which could have a large negative impact, including: political risk (general Russian dysfunction), currency risk (the falling Ruble), oil prices, economic risk (the worsening Russian economy). This is aside from general business risk (such as competition).

Although I am holding off on buying the stock, this is not necessarily a claim that the stock won't go up. The stock may very well double in a year or less. It's possible that all of the above problems have been factored into the sock already. When it comes to beaten-down stocks, it is generally true that the stock rebounds before the fundamentals. I do think the stock does has a lot of upside here. But there are simply too many risk factors that make the risk/reward ratio unfavorable. This is in addition to the fact that I don't know the company well, so there is familiarity risk.

I am also not averse to trading YNDX in the short-term, if it were to fall another $1 or more.

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