Curious Investments: Buying Google
I decided to commit more capital to Portfolio A this month and added what was supposed to be a “full position” worth of cash. I’ve had a few stocks on my watch list over the last few days including those five which I listed as part of the hypothetical Curious Investor Equity Income Strategy, but it was Google which popped onto my buy list with its price action last night and moderate follow through today in a down market. As a result, it seems that I’m going to be pulling a little bit of financial maneuvering here.
The portfolio I’m playing with isn’t large by any stretch of the imagination. It’s total value is about $3500 with about $1300 in China Mobile, $800 in Piper Jaffray, and $1400 in cash which represents to me a full position as it keeps my commissions on each full transaction to just 1%. My initial intent was to turn the Piper Jaffray lot into a trading lot now that it has depreciated to the point where percentage losses are not overly significant and to continue to invest the two larger lots on a slightly more “investment grade” strategy. As I mentioned in the “My Stock Holdings” (a.k.a. My Portfolios) portion of this website, Portfolio A’s strategy is designed around technical buy and sells with a relatively rudimentary set of criteria as far as quality and value go. When markets are running hot, I tend to trade on technicals with about a 3 to 6 month outlook. When markets look a bit more uncertain, I try to make sure I have at least one position that is of enough quality to weather the storm and hope to have the discipline to leave the trading lot on the sidelines. Before committing extra capital, I saw China Mobile as the “quality” pick – strong balance sheet, through-the-roof growth, and clear competitive advantages – and Piper Jaffray as the momentum pick.
In the case of Google, I see it two birds in one stone. A look at the graph shows that it’s picking up momentum as investors gain more confidence and realize that the sell-off after its recent earnings report may have been a little over blown. I prefer a longer basing period (here we only see about 1 and a half months worth), but I like the rest of the technicals right now which show a MACD crossover, RSI leading the price appreciation, and the stock price breaking through the resistance line which I drew after the gap down on 7/31. It’s not textbook in that volume hasn’t come in yet, but, with Google, I trust that by the time volume comes into the stock the relative value will be gone. I’m looking for Google to fill the gap within the next 6 months with an outside shot at doing it within the next quarter. Though recent turmoil and questions about the the economy in general leave me wary of the next earnings report, I feel comfortable holding through earnings with this one.
Long-term, I could see Google with valuation that supports a price of $600. Using the numbers found at Reuters, Google is currently trading at 45 times the last twelve month’s earnings and 27 times projected 2008 earnings. Taking the lowest analyst estimate of 2008 earnings at $18.13 a share at the end of 2008 and even allowing for current P/Es to contract to their forward rate, we see support in the next twelve months for a 516.15 price (18.13*27). Given that Google’s ROI, ROE, and earnings growth are well over 20%, it’s more than likely that we’ll see P/E stay well above 30 and that Google’s FY 2008 EPS will fall closer to the average analyst estimate which currently stands at 19.67. Thus, assuming it only meets expectations, we see ~600 in the next year. At the current price of 525, I’m only risking 1.7% to the downside for nearly 15% to the upside.
Because of Google’s price, I was not able to buy a full allocation. Also, since I see some strength in Piper Jaffray’s chart and have no immediate alternatives in my shopping list, I did not want to liquidate the position just to buy one more share of Google and leave the rest in cash. Thus, I was only able to purchase two shares. Looking forward, I’m not sure how to classify this allocation just yet. Should Google make a faster than expected push to $600, this investment would quickly reach the amount necessary to be considered a “full allocation” and I will likely treat it as one of the longer-term, stable picks for this portfolio. Should it rebound quickly and hit a wall back near $560, it is possible I will trade this along with Piper Jaffray and re-allocate as I originally planned – one full allocation and one trading lot. Until then, let’s just hope that both move in the direction that the charts are telling me they will.
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