Yahoo! Sports Forms ‘Alliance’ With NBC Sports, Time to Invest?

How can investors play this situation?

For starters, we can see that shares of Yahoo’s stock have returned nearly 29% over the past three months alone, easily outpacing the likes of Disney (-4%), Time Warner (9.5%), CBS (-2.7%), and News Corp (2.4%). Much of Yahoo’s price appreciation can be attributed to two straight quarterly EPS beats – by an average margin of 28% – but Marissa Mayer’s step into the CEO slot has assured even the wariest of investors.

Looking ahead, Wall Street expects Mayer and Co. to generate EPS growth of 11-12% a year over the next half-decade, which is quicker than its previous five-year growth rate (9.6%). More importantly, this forecast is more or less in-line with what’s expected of Disney (12.5%), Time Warner (12.0%), CBS (13.9%), and News Corp (14.0%).

From a valuation standpoint, we can see that investors are severely under-appreciating Yahoo’s growth potential in relation to its peers. The company’s shares currently sport a price-to-earnings growth ratio of 0.51; typically any figure below 1.0 signals an undervaluation. Disney (1.26), Time Warner (1.48), CBS (1.10), and News Corp (1.60) are all more than twice as expensive. In other words, the markets are treating Yahoo like a low-growth stock, even though it is essentially on par with the rest of its peers.

In the hedge fund industry, some of the top Yahoo bulls at the end of last quarter were Dan Loeb’s Third Point (see Loeb’s full portfolio), Tiger Global Management, and David Einhorn’s Greenlight Capital (see David Einhorn’s newest stock picks). On a capital allocation basis, aggregate hedge fund interest in Yahoo increased 27% in Q3 alone (qoq), to surpass $4 billion. Of the 400 funds we track, 57 currently hold long positions in YHOO stock. This is greater than the fund interest in Disney (47), Time Warner (37), and CBS (38), while trailing only the interest in News Corp’s class A shares (60) out of the companies we’ve discussed. Here’s a look Yahoo’s fund interest in full.

To recap: the NBC Sports deal will be huge for Yahoo! Sports’ ongoing battle with ESPN, and from an investing standpoint, now may not be a bad time to jump into shares of the former. Yahoo’s stock trades at a deep discount in relation to its closest media peers, and also has solid support from the smart money.