Posted 19 Sep 2018 10:06 PM Edited 19 Sep 2018 10:06 PM

Altaba's appeal as a play on Alibaba Group Holdinghas increased following a series of steps that have simplified its structure and reduced legal risk.

The company (ticker: AABA), the former Yahoo, has in the past six weeks completed its sale of a $6.5 billion stake in Yahoo Japanand used part of a hefty position in Alibaba to execute a $13.8 billion offer that let Altaba holders swap their stock for shares in the e-commerce giant. Altaba has also moved to resolve litigation stemming from the widely publicized Yahoo data breaches several years ago.

Altaba shares closed 92 cents lower Tuesday at $64.98, reflecting an ongoing slide in Alibaba, whose shares fell $2.24 to $156.65. There is nearly 0.5 of a share of Alibaba embedded in each share of Altaba.

At the close of trading on Friday, Altaba traded at a 23% discount to its net asset value, based on a calculation on its web site that the company updates each week. Roughly 98% of Altaba's assets now consist of Alibaba stock and cash.

Bulls argue that the discount is too wide and that Altaba offers a good proxy for Alibaba, whose shares have declined more than 25% from a record $211.70 reached in early June.

'Altaba and its CEO Tom McInerney have been diligently executing on a shareholder value-creation strategy that was put in place when he became CEO last year, and we're getting close to the end of that process,' says Jeff Lignelli, chief executive officer and portfolio manager at Incline Global Management in New York.

Incline holds Altaba stock.

Lignelli argues that Altaba is a cheap way to play what he views as an undervalued Alibaba. The Chinese company's shares now trade for around 30 times projected earnings for the company's fiscal year, which ends in March. He thinks Alibaba stock, depressed lately by concern over profit growth and the selloff in Chinese equities, is heading back over $200.

Revenue growth remains strong at around 60%.

The discount on Altaba shares relative to its NAV'an issue for several years'reflects investor concerns about taxes. Altaba probably would pay a tax rate of about 21% if it were to completely liquidate its remaining 283 million Alibaba shares, worth about $45 billion.

The 23% NAV discount on Altaba is wider than the likely tax rate, reflecting the probability that management would have to make concessions to sell such a large stake. Excluding Altaba's net cash, the recent NAV discount is nearly 27%, a figure fans of the stock say is more meaningful because Altaba wouldn't have to pay taxes to distribute cash.

Lignelli says the discount reflects 'deal fatigue' among investors who have waited years to cash in on Yahoo's assets. Barron's has written favorably about Altaba on several occasions, including an article on June 9.

On Monday, the company announced a new $5.75 billion stock repurchase authorization as it continues a buyback program that began in June 2017, when Yahoo sold its core Internet business to Verizon Communications, changed its name to Altaba and moved to simplify its structure under McInerney, who succeeded former CEO Marissa Mayer.

When McInerney took over, he didn't give a timetable to wind down the company but his goal has been to effectively liquidate Altaba tax-efficiently as quickly as possible. Reflecting this, the company has acted expeditiously to execute its prior buyback authorizations. Altaba now has about $7 billion in net cash to implement the new repurchase program.

Since it began its purchases in June 2017, the company has bought back or retired about $24 billion of stock. By acquiring the shares at a time when Altaba was cheap relative to Alibaba, management has helped the company's stock to outperform a composite of Alibaba and Yahoo Japan by 16 percentage points over that period.

One key to the outlook for Altaba will be how well Alibaba performs. JP Morgan analyst Doug Anmuth resumed coverage of Altaba last month with an Overweight rating and a price target of $88, reflecting a target for Alibaba stock of $215 from Alex Yao, a fellow analyst at the bank.

The other important variable will be what Altaba decides to do with its remaining Alibaba stake. The company probably would like to sell itself to Alibaba for stock, which would be tax-efficient for Altaba holders. The thinking on Wall Street is that Alibaba might be willing to buy Altaba at a 10% to 15% discount to the value of its Alibaba stake in what would amount to an attractive share buyback for Alibaba.

Altaba presumably would accept such a deal because it would be more attractive than liquidating the Alibaba stake and paying a 21% tax rate. However, Alibaba hasn't shown interest so far in such a deal. Alibaba declined to comment.

In a shareholder letter released Monday, McInerney expressed satisfaction with the company's progress since June 2017.

'While we're not quite done, we stand today as a vastly simplified company, with 98% of our assets in one stock or cash and a much shorter list of contingent liabilities,' he said. 'We have a trading history of very high correlation to Alibaba, while materially outperforming it on a total return basis. And yet we continue to trade at a material discount to our after-tax Net Asset Value, which we will continue to actively seek to reduce.'

Asked in a Barron's interview Monday about the prospect of a deal with Alibaba, he said that Altaba 'is open to anything that will drive shareholder value.'

Many investors believe that Altaba's simpler structure will make it more appealing to Alibaba. The performance of Altaba shares will be driven by Alibaba's stock price, but investors can take comfort that management has played its hand well so far and is determined to deliver for them.

U.S. benchmark's bigger-picture backdrop remains bullish.

Posted 19 Sep 2018 10:03 PM Edited 19 Sep 2018 10:06 PM

Charting a bull-flag breakout attempt: Dow industrials challenge seven-month highs

Focus: China rallies to the breakdown point, Retail sector digests break to record territory, FXI, XRT, HD, EAT, CIEN

Technically speaking, the U.S. benchmarks have established a bullish September holding pattern, treading water even amid recently renewed China-U.S. trade tensions. Against this backdrop, the Dow Jones Industrial Average is rattling the cage on a breakout ? challenging seven-month highs ? while the comparably softer Nasdaq Composite has narrowly maintained key trendline support.

Before detailing the U.S. markets? wider view, the S&P 500?s SPX, +0.10%  hourly chart highlights the past two weeks. As illustrated, the S&P continues to digest the August breakout. Tactically, near-term support (2,884) is followed by a firmer floor matching the breakout point (2,873).

Meanwhile, the Dow Jones Industrial Average has pulled in from a nominal seven-month high. The range top closely matches the August peak (26,168) an area that has capped the Dow on a closing basis. The blue-chip benchmark has ventured atop resistance early Tuesday, though as always, it?s the close that matters. A breakout attempt remains underway.

Against this backdrop, the Nasdaq Composite?s COMP, -0.16%  price action remains softer, but distinctly technical. To start, the index topped last week within one point of resistance (8,042), detailed previously. It subsequently sold off to the range bottom, closing Monday (7,896) within one point of major support, also illustrated below. Tuesday?s early upturn punctuates a successful retest.

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has apparently survived its latest test of trendline support. Two slightly deeper inflection points stand out:

  • The 50-day moving average, currently 7,879.
  • Support matching the September low of 7,874.

Tactically, an eventual close under these areas would mark a violation of the trendline ? combined with a ?lower low? versus the September low ? raising a technical caution flag. The Nasdaq?s intermediate-term bias remains bullish barring such a move.

Looking elsewhere, the Dow Jones Industrial Average is acting well technically. The chart illustrates a bull flag pinned to the steep August rally from trendline support. The prevailing range top matches the August peak (26,168) ? also illustrated on the hourly chart ? and a breakout attempt remains underway.

Meanwhile, the S&P 500 has established a three-week range, digesting the August break to record territory. To reiterate, major support broadly spans from 2,863 to 2,873, levels matching the early-August peak and the breakout point.

The bigger picture

Collectively, the U.S. benchmark's bigger-picture backdrop remains bullish. On a headline basis: The Dow Jones Industrial Average has established a bull flag, challenging seven-month highs. The S&P 500 is traversing an orderly range, slightly under record highs. The Nasdaq Composite?s backdrop remains comparably softer, though the index has maintained key trendline support.

Moving to the small-caps, the iShares Russell 2000 ETF IWM, +0.22%  has flatlined near major support. The specific area matches the breakout point (170.20) an area closely followed by the 50-day moving average, currently 168.90. Monday?s close snapped a stretch of seven consecutive closes fractionally above support. The retest remains underway.

Meanwhile, the SPDR S&P MidCap 400?s backdrop remains incrementally stronger. Recall that the MDY nailed its record high (374.10) last week ? to the decimal ? a level initially established Aug. 27. The selling pressure near resistance has registered as lukewarm. Conversely, well-defined support matches the breakout point (366.70) an area closely matching the 50-day moving average.

Similarly, the SPDR Trust S&P 500 SPY, +0.09%  is traversing a well-defined range. To reiterate, the SPY?s record close (291.48) and absolute record peak (291.74) remain slightly overhead. Last week?s closing high (290.88) and absolute peak (291.27) registered within striking distance.

As it applies to the S&P 500, its six-month backdrop remains straightforward.Recall that the August breakout registered as powerful, encompassing three straight closes atop the 20-day volatility bands (not illustrated). By comparison, the September pullback has been orderly, underpinned by major support. Tactically, the S&P 500?s record close (2,914.04) and absolute record peak (2,916.50) remain within striking distance.As always, the response to resistance is worth tracking. The chances of a breakout improve to the extent the S&P holds tightly to the range top. On follow-through, the S&P?s next target projects from the September low to the 2,968 area. (Start with the record peak and subtract the September low: 2,916 - 2,864 = 52 points. Then, add the result to the breakout point: 2,916 + 52 = 2,968.) Beyond technical targets, price action within the September range supports a comfortably bullish near- to intermediate-term bias.

Tuesday?s Watch List

The charts below detail names that are technically well positioned. These are radar screen names ? sectors or stocks poised to move in the near term. For the original comments on the stocks below, see The Technical Indicator Library.

Drilling down further, the iShares China Large-Cap ETF FXI, +1.65%  has rallied from 14-month lows even amid the latest U.S.-China tariff exchange. Still, the prevailing upturn has been capped by the former breakdown point, an area matching gap resistance (41.70). On further strength, trendline resistance is followed by the August peak (43.75). An eventual close higher would mark a ?higher high? more firmly signaling a trend shift. The FXI? s intermediate- to longer-term bias remains bearish pending such a rally.

Moving to U.S. sectors, the SPDR S&P Retail ETF is acting well technically. As illustrated, the group has established an orderly one-month range, digesting the sharp August break to record territory. Trendline support closely tracks the 50-day moving average, currently 50.80, and also matches the breakout point. The group?s uptrend is firmly intact barring a violation. More broadly, the group is well positioned on the five-year chart, digesting the recent rally atop the 2015 peak.

Initially profiled Sept. 5, Dow 30 component Home Depot, Inc. HD, +0.30% remains well positioned. (Yield = 2.0%.) Earlier this month, the shares knifed to record territory, rising amid the anticipation of Hurricane Florence. The ensuing pullback has been orderly, fueled by deceased volume, placing the shares 3.4% under the September peak. More broadly, Home Depot is well positioned on the three-year chart, rising from a continuation pattern pinned to the steep late-2017 rally. A sustained posture atop the breakout point (203.50) supports a bullish bias.

Ciena Corp. CIEN, +0.13%  is a mid-cap networking name positioned to rise. Late last month, the shares gapped to 10-year highs, rising after the company?s third-quarter results. The breakout resolved a head-and-shoulders bottom defined by the April, June and August lows. Tactically, the subsequent flag is a continuation pattern ? underpinned by near-term support (30.25) ? and a posture higher positions the shares to build on the August spike. Ciena is also well positioned on the four-year chart.

Finally, Brinker International, Inc. EAT, -0.36%  is a mid-cap restaurant operator coming to life. (Yield = 3.1%.)
As illustrated, the shares have reclaimed trendline resistance and the breakdown point. The breakout signals a trend shift.Underlying the upturn, its relative strength index (not illustrated) has registered 10-week highs, improving the chances of incremental follow-through.Tactically, the trendline pivots to the support, circa 47.00, and the rally attempt is intact barring a violation.