On Friday, I closed my position in Yahoo (NYSE:YHOO) at $41.85. I purchased the stock at the beginning of the year during the stock market selloff as a cheaper way of buying Alibaba (NYSE:BABA). At the time I bought Yahoo, China’s economic growth was slowing and investors ignored Alibaba as a play on Chinese e-commerce that could withstand, and perhaps benefit from a China slowdown as the economy shifts its reliance away from investment towards consumption.
After buying the stock, my hope was to see the Chinese economy begin the de-leveraging process while Alibaba maintains strong profit growth leading the market to award Alibaba a higher multiple for this decoupling.
Instead, the Chinese government responded to the economic slowdown in the same way it has in the past: credit-fueled infrastructure spending. Thus, the economy avoided a sharp downturn in exchange for more debt, a resumption in the real estate bubble in tier 1 cities and a deeper slowdown in the future. Alibaba’s valuation has risen from 22x 2017 earnings at the time of my purchase to 32x currently. I believe that once this latest stimulus wears off and China experiences another slowdown, Alibaba could get hit again.
Another reason for my sale is that the Yahoo user data breach that has been recently disclosed adds uncertainty to the Verizon deal. As a result, I am content with my 25% gain in less than a year and will look to redeploy capital.