By Paul Goodwin, Chief Analyst, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 11/27/13 Sign up for Cabot Wealth Advisory—it's free!
For the tenth stock in my Growth and Value series, I’m going to feature Google (GOOG), one of the highest profile tech stocks in the world. And I’m going to be both brief and decisive, because the story of Google has one big lesson to teach.
Roy Ward’s list of the Top 275 Value Stocks says that the Maximum Buy Price for GOOG is 630.75 and the Minimum Sell Price is 997.52. That’s simple enough.
But when the November issue of Cabot Benjamin Graham Value Investor came out, GOOG was already trading at 1027.04. And it has since climbed to around 1045. So Google continues to climb farther and farther beyond the level that made it attractive to a value investor. The last chance you would have had to buy GOOG as a value stock would have been at the end of November 2012.
As you’ve probably noticed, a value investor who bought GOOG at 663 and sold it when it topped 997.52 in the middle of October would have booked a very attractive profit of around 50% in just a little under 11 months!
Value investors are often told to be patient and wait for the valuation metrics to do their work, but value stocks can also move very quickly when conditions are right.
The growth proposition for GOOG is complicated. Google was first covered by Cabot Top Ten Trader back in June 2005 when the stock was trading at 290. I haven’t looked up the records, but the stock was probably dropped from Top Ten in early 2006, when it fell from 466 in January to 340 in March.
The stock made a nice run in late 2007, but went over the falls in 2008, dropping like a lead weight during the Great Recession. GOOG eventually fell from around 700 to below 250 in November 2008.
But the stock came back, showing up in Top Ten in October 2009 (trading at 552), October 2010 (618), December 2011 (622), September and October 2012 (750 and 741) and October 2013 (1004).
The big lesson to learn from all these widely spaced appearances among the top growth stocks of the entire market is that growth stocks are volatile. You don’t buy and hold them as you would with dividend-paying stocks (GOOG doesn’t pay a dividend). And you don’t buy them and then sell them when they hit a set valuation level as you would with a value stock.
Stocks go through cycles of price appreciation, which makes them look good to growth investors, and cycles of price decline, which makes them more attractive to value folks. The key is to find high-quality companies with strong growth potential, then identify the right price point to buy them.
Google shares are owned by 1,667 institutional and mutual fund investors, who hold 87% of the total float. Such a high level of ownership by whales actually makes GOOG a little less volatile than the market as a whole. But growth investors still have to contend with fluctuations caused by disappointing (or encouraging) quarterly earnings reports, macroeconomic news, challenges from competitors and a host of other variables.
For myself, GOOG isn’t quite my cup of tea right now. Companies with a market capitalization of $292 billion and sales of over $57 billion don’t usually have the upside potential I’m looking for. On the other hand, a stock that makes it into Top Ten is a market leader. Period.
So that’s it for my series of stocks that share growth and value characteristics. I think that understanding the difference between growth and value stocks is very important for individual investors. When you understand which stocks appeal to you, you will be well on your way to knowing your own investing personality. And that’s a good thing.
By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 1/25/10 Sign up for free Cabot Wealth Advisory e-newsletter
Google (GOOG), one of the most recognized companies in the world, is now leading the way in cloud computing...which fits in well with the company's mission: "To organize the world's information and make it universally accessible and useful." Google generates revenue by providing companies with opportunities for targeted advertising. Thousands of companies use Google's AdWords and AdSense programs to promote their products and services on the Web with advertising relevant to the information displayed on search pages.
Google management has aggressively stayed ahead of its competition by expanding and improving GOOG's search engine and advertising. Founded just 10 years ago, the company's 2009 sales exceeded $23 billion with profits of more than $6 billion. The balance sheet is very strong with no debt and $24 billion in cash. The company pays no dividend.
Google appears to be the leading developer of cloud computing. Google employees can now store most of their business and personal software and data, such as pictures, videos, presentations and emails, on the Web. This makes software and data equally accessible from home computers, public Internet cafés or smart phones. Google's cloud computing also makes damage to a hard drive less important.
According to a Wall Street Journal article, Google is expected to launch a service in 2010 that will let users store the contents of entire hard drives online. The company has not confirmed this plan, but Google already enables users to port personal and business data to the Internet and use the company's Web-based software. Google's Calendar organizes events, Picasa stores pictures, YouTube (now owned by GOOG) holds videos, Gmail stores emails, and Google Docs stores documents, spreadsheets and presentations.
Sales increased 9% during the 12 months ended 12/31/09 while earnings per share jumped 19%. We expect sales growth of 14% and EPS growth of 20% in 2010 and in future years. Google will continue to benefit from increasing Internet usage and the effectiveness of online advertising.
Google may cease operations in China because of cyber attacks on Google users and China's censorship of free speech. I believe the Chinese government will not back down, and Google will cease operations in China. The company, though, derives less than 1% of its revenues from China!
The recent decline in Google shares has created an outstanding buying opportunity for investors. GOOG shares now sell at 24.8 times my 2010 earnings per share forecast of 23.50, which is low in comparison to the 20% EPS growth that we foresee during the next three to five years.
Editor's Note: You can read more about Google including buy and sell advice in Cabot Benjamin Graham Value Letter. You'll also get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market's best undervalued stocks. And he will tell you exactly when to sell, too...click here now to get started today!
J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.
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1/25/10 Google (GOOG): Now leading the way in cloud computing