Lately it's been very difficult for investors to get their bearings, but I can tell you that the winners in this game will be companies with little or no debt. Forget what stock values are doing now and focus on the future. You can take it to the bank that stocks gaining in value will have started from a very solid balance sheet foundation.
That said, I want to talk about Yahoo (NASDAQ: YHOO).
Yesterday the company was in the news again with reports that former AOL chief Jon Miller is seeking capital to purchase YHOO outright for a price that is reported to be in the $20 range.
YHOO shares rocketed higher on the news, immediately jumping up by nearly $1 per share, or approximately 10%.
My initial reaction, as you might expect, was skeptical. Jump on this news as a chance to dump shares. Management at YHOO, with or without Chief Yahoo Jerry Yang, has destroyed shareholder value so much that it would be hard to believe that anyone would pay a premium for the stock.
How could it be that a lone ranger from the failed AOL model be considered a serious alternative to YHOO going it alone? It makes no sense until you take a closer look at YHOO fundamentals. There the story starts to get a little more interesting.
YHOO's balance sheet is pristine. They have minimal debt and $3 billion in cash. Book value is more than $8 per share. At current prices, YHOO is valued at slightly more than one times book value.
Now, a company with lots of debt and operating losses deserve a valuation at one times book value or much less. Think the home-building sector here. In the case of YHOO, the company is still generating a profit.
Assume for a moment that YHOO's inept management is removed from the equation, and it is entirely possible that YHOO at $10 or $11 per share is a fantastic bargain. Thus, the rumor of a sole buyer operating independently may not be so far-fetched.
Are you listening Microsoft (NASDAQ: MSFT)? Don't be so darn smug about YHOO. Do you really want to lose this gem of a business to a lone ranger?
I don't think so.
It may be a bit too optimistic to hope for a bidding war in this current environment, but given YHOO's balance sheet, it may be time to back off on its continued demise.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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