Losing your head when the rest of the market is panicking can be an expensive proposition. Just look at the crazy round-trip action in Yahoo! Inc. (NASDAQ:YHOO) since yesterday afternoon.
YHOO crashed 7.6% Tuesday on fears that the Internal Revenue Service could change the rules on tax-free spinoffs, essentially scuttling its own planned spinoff its $40 billion stake in Alibaba Group Holding Ltd (NYSE:BABA).
YHOO’s BABA stake is the only reason many investors deign to own Yahoo stock, which has almost nothing else going for it. And the only way YHOO can cash in on this holding without having to give 40% of it to the IRS is through a tax-free spinoff.
Enter a report that the IRS is considering changing its favorable tax treatment of spinoffs. If that were to come to pass, YHOO’s BABA stake would go from a value of $40 billion to $24 billion. That gave investors about 16 billion reasons to sell Yahoo stock.
Come Wednesday morning, however, it became clear that the market greatly overreacted. The report that set off the panic wasn’t great news for YHOO but means far from a disaster. A Bloombger report states:
“Isaac Zimbalist, senior technician reviewer at the IRS Office of Associate Chief Counsel (Corporate), said on Tuesday that the agency is considering changes to rules concerning spinoffs. The Internal Revenue Service will hold off on requests for rulings that are received starting Tuesday as the issue is studied, he said at a D.C. Bar Association event. Requests already received will move forward, but that is subject to change. It wasn’t clear what would happen to requests, such as Yahoo’s, that are already in the pipeline.”
YHOO In the Clear
In other words, this is no where near a done deal, as bullish analysts were quick to point out. Indeed, it’s barely a deal. Robert Peck, an analyst with SunTrust Robinson Humphrey, nailed it when he wrote this in a note to clients:
“It is extremely unclear what exactly the IRS may be studying, or what impact it could have to Yahoo’s proposed spin. We believe that ambiguous statements from a non-senior employee at a DC event is not how the IRS would communicate breaking or ‘material news.'”
The only thing left for the Yahoo stock bulls to do was advise clients to buy the dip. With YHOO rising about 4% early in the following session, it looks like plenty of folks are taking that advice.
There’s very little reason to own YHOO except for its Alibaba stock holdings, and anything that threatens is value is a risk. For now, the IRS moving the goal posts isn’t one of them.
If you’ve suffered with Yahoo stock this long, it’s not time to panic. The BABA prize is still coming.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
