The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

29 June 2005

My shopping list

I had mentioned that I continually update my shopping list, especially as the market makes large directional moves. My shopping list includes companies that I:
1) Invest in;
2) Trade around; or
3) Monitor closely, as a new opportunity.

If the specific opportunity fails to inspire interest as an investment, then I rarely, if ever, buy it as a trade. I seek an alignment of:
a) My needs;
b) The specific opportunity's placement within its continuum;

c) The near term direction of the market (an important distinction re time and the market that, if reminded, I will discuss in a future post)

When considering any opportunity, please recall the four critical criteria, as I deem them: price, volume, pattern, and trend.
THE LIST (with annotations)...

Abercrombie & Fitch/ANF -- see archives
American Eagle Outfitters/AEOS -- see archives
Apple/AAPL -- see archives
-- breaking out as I type, albeit with insufficient volume
Cameco/CCJ -- leader in the uranium group, nice i/t base
Cheescake Factory/CAKE -- see archives
Coach/COH -- see archives
Domino's/DPZ -- potential short term base
Google/GOOG -- did you think it would somehow not make this list?
Johnson & Johnson/JNJ -- very near its either-way inflection point; I believe that break will be up
Joseph Bank/JOSB -- see archives; potential short term base
Men's Wearhouse/MW -- see archives
PF Changs/PFCB -- see archives

Starbucks/SBUX -- Patience...
Station Casinos/STN -- potential intermediate term base
Syneron Medical/ELOS -- a reluctant inclusion
Timberland/TBL -- see archives
Urban Outfitters/URBN -- arguably the leader for stock performance among the specialty retailers
Whole Foods Markets/WFMI -- Price is immediately beneath its all time high; potential short term base.
(I might lose interest in any one of these opportunities -- or add new ones.)

And for those who like to hedge their longs with a few shorts, I would monitor the homebuilders, which might have put in their high trade, and now build a top -- or a base. Only the passage of time, and the subtle clues of course, will tell the tale.

Please share your questions, comments, and recommendations. (The last, with rationale included.)

28 June 2005

Google Earth

The comments of Google Earth are from Brad Hill...

"Google has released Earth, which is a significant cosmetic upgrade to Keyhole that also incorporates more complete global satellite imagery. The best news is that Earth is free, as hoped, whereas Keyhole required an annual subscription. (Earth Plus costs $20, and provides GPS support and better annotation tools for marking up the screen. Earth Pro is for institutional use — flyover maps for weather forecasts, and such.)

"Google Earth is highly recommended to broadband users. It adds a fabulous dimension to local search, and is tremendously fun on its own. Earth is arguably Google’s best product." (Wow! -- dmg)

(For link, check sidebar, then bullets under "Google")

The role of Volume:Price

(Yes, this is yet another look at Google/GOOG. But why not study the best?)

This first chart (below) shows again the item that Ray Fairfax and I first shared ~2 months ago: that the Relative Strength (RS) line as computed by Daily Graphs reaches new highs (see 1) before the stock price; this type of action typically is quite bullish.

[click to enlarge]

This second chart (below) highlights what I want to share this morning -- the relationship of volume to price...

[click to enlarge]

Note that during bases 1 and 3, volume and activity diminished, and that when the price rallied (see 2 and 4), volume expanded, at times explosively. The squiggly line in the volume study is a 50 unit simple moving average (sma) of volume, so in this study it equals 50 minutes. Even though moving averages are a derivative of the study, they have a purpose. (This is not the post to share understanding of moving averages, etc.) In the 1-minute bar chart above, it acts as confirmation of the aggregated single bars and it helps to isolate specific bars (both volume and price) that require deeper study.

When the four critical components (as I deem them: price, volume, pattern, and trend) are in alignment, then reducing your perspective to the intra-day periodicities (such as the 1-minute) will help guide you to the inception of a move at the best price and moment. Of course, this requires that you monitor your opportunities on an intra-day basis, something not everyone is willing to do, nor is it everyone's time frame. (I, however, prefer to fill at the best price possible at the moment of action.)

All this mean that, for Google/GOOG, all systems remain "go"; there is nary a sign of reversal in sight (as I have oft-stated).

In addition, there is an article available for reading at the NY Times (At $300 a Share, Google Looks Pricey and Still Irresistible) that is the typical equivocating journalistic pabulum; jabbering much, while saying little. If interested, go here.

And one final time, a snippet from Tim Villano's morning market comments...

"While the current timing sequence suggests that holding of last Friday's lows provides an opportunity for recovery and support into July 11, longer-term intraday patterns are now negative, which argues that further reaction lows in the (SPX 1185-1180) range cannot yet be ruled out. The Cash must rally back to the (SPX 1211) mark or higher to turn the pattern neutral. This will depend on confirmation of a topping pattern in Crude.From a bigger picture standpoint, recovery for the tape into the week of July 11 appears to be a selling opportunity and perhaps a signficant change in market psychology in line with the notion of a topping process."

26 June 2005

Planning for contingencies

It should be unnecessary by now to learn from me that the markets reversed last week (Wednesday/Thursday), from up to down. There are any number of explanations -- the cost of oil at $60/barrel, the repeated attempts to breach (presumed) resistance at NASDAQ 2100 (the one average with the most apparent threshold of resistance), etc

But it is the ferocity of the decline that is most startling. In two days, the plummet of the averages and individual stocks had the aerodynamics of an anvil. Warning shots over the bow occurred, for me, when former leaders such as American Healthways/AMHC and Websense/WBSN failed to follow as written their specific scripts. I sold other positions throughout the week, selling down to Google/GOOG and Apple/AAPL -- and I probably should have lightened the Apple/AAPL holdings.

Why did I sell? When the market enjoys upside momentum, it is okay to buy and hold breakouts, including those stocks extended from support (whether static or dynamic), but when the market turns down -- especially when that decline is as ferocious as occurred last week -- then it is folly to believe that most stocks will not turn down as well. Each stock must find its level of support. Yes, there will be leaders that will act initially as a safe haven from the storm, and rise; therefore, acting as a sop for investors' money. (Think Google/GOOG.) But should the decline continue, or worse, pick up pace... So I deem it critical to plan for all contingencies, to determine in advance (via scenario planning) whether the positions I hold could decline, and how deep if so. If the answer is below my acquisition cost (e.g., WBSN or AMHC) then I sell. I always could repurchase later, if still desired.

It is not easy to hold shares in any stock, no matter how bullish its future, if your profits wither away during a market decline. For example, an investor might be "okay" with holding GOOG to the low of its presumed base, or ~$250. What happens, however, if it should break down beneath that price level, and the market at that specific moment apears set to continue its plummet? What do you do then? Only time will tell whether such a decline occurs for either the market or GOOG. But having planned for all contingencies, you will know what to do and how to act when faced with its reality.

During a general market decline (and this one must continue lower before it qualifies as anything but a passing summer squall), the task I set myself is to find the market's new leadership. This requires more than finding isolated leaders such as Google/GOOG, but to find groups and sectors that out-perform on both a relative and absolute basis, akin to the leadership of the home-builders the past several years. (Has this group finally hit its high watermark...?) From sector and group leadership comes market leaders.

And having broached the topic of Google/GOOG...
1) It is rare to have a market leader as powerful as Google/GOOG that lacks concommitant group or sector leadership, but then Google/GOOG is sui generis, a "singular opportunity"
2) That GOOG upticked in the manner it did during Friday's sell-off augurs positively. This short term base ($300 - $265), however, is a mere 3 weeks in duration; I would prefer it continue to trade sideways -- the bigger the base, the bigger the subsequent move. Of course, the market doesn't listen to me!

The world's most intriguing company

from the June 27, 2005 edition -

The world's most intriguing company
By Gregory M. Lamb Staff writer of The Christian Science Monitor

MOUNTAIN VIEW, CALIF. - Impossible dream: Take all the books ever written, digitize them, and make them available to the world.

"We had all these cockamamie schemes for how we could get content," recalls Marissa Mayer, director of consumer Web products at Google. "We thought, well, could we just buy books? But then you don't get the old content. We thought maybe we should just buy one of every book, like from Amazon, and scan them all."

How long would it take to scan all the world's books? No one knew, so Ms. Mayer and Google cofounder Larry Page decided to experiment with a book, photographing each page so that it could be digitally scanned. "We had a metronome to keep us on rhythm for turning the pages. Larry's job was to click the shutter, and my job was to turn the pages," Mayer says. "It took us about 45 minutes to do a 300-page book."

With that ad hoc experiment, Google began its now controversial Digital Library project last December, signing agreements with the New York Public Library and the libraries of Stanford, Harvard, Oxford, and the University of Michigan to put their holdings online. Current projection: "Maybe inside of the next 10 years we'll have all the knowledge that's ever been published in book form available and searchable online," she says. "It's really a grand vision."

Grand vision seems to be the touchstone for the seven-year-old company, which earned more than $1.2 billion last quarter and is growing so fast and in so many directions that many observers are left scratching their heads. Just what is Google? Does the company itself even know? If it does, will its supersecret culture allow that vision to flourish?

Where the company's bread is buttered right now is clear: Nearly every one of its billions of dollars comes from selling advertising that appears when people search the Web using its ultrapopular search engine. With analysts saying more and more ads will be moving away from TV and print to online, Google would seem to have a bright future just doing what it's doing.

But Google has also become the world's biggest 'media' company, larger than TimeWarner, according to some, if a company can have that moniker without producing any original content. Others have their own ideas about what is, arguably, the most intriguing company on the planet.

"I think at its heart Google is a technology company," says David Edwards, an analyst at American Technology Research in San Francisco. "But it gets paid like a media company."

"They [Google] are a software company," proclaimed Microsoft's Bill Gates in a Fortune magazine article last month. "They are more like us than anyone else we have ever competed with."

"They're a little like a fetal stem cell," says Geoffrey Moore, a consultant to high-tech businesses and author of the popular management book "Crossing the Chasm," searching for a metaphor. "It could be an arm, it could be a head, it could be a leg." With a culture that stresses freedom and innovation, Google's "got lots and lots of possibilities" and may become "a lot of different businesses," he says.

The company's e-mail service, Gmail, and its new customized home page make Yahoo! a competitor. But as Google develops software, including a possible Web browser or a "thin client" that would allow more computing to take place on its servers instead of on individual desktops, it takes on Microsoft. Its new online payment service, which some have dubbed Google Wallet, would appear to rival eBay's successful PayPal, though Eric Schmidt, Google's chief executive officer, has denied that's the case. This week, a prominent eBay engineer starts work at Google.

"Google is in the position of being a lot of people's rivals, and that could be a potential problem for them," says Andy Beal, vice president of marketing at WebSourced, an Internet marketing firm in Morrisville, N.C., and editor of

Developing a PayPal-type service could open up new opportunities and revenue sources, Mr. Beal says. The possibilities might include an auction service, a video-on-demand service, or even its own version of iTunes. Think about it, he says. "You'd use the world's best search engine to find music, and then use Google Wallet to pay for it."

Google's two guiding statements - "Do no evil" and "Organize all the world's information and make it universally accessible and useful" - say nothing overtly about computers, search engines, or ads.

But serving up advertising fits the mission because "we look at ads as information," says Tim Armstrong, vice president for advertising sales. Google believes it can target ads so specifically to each user that the ads will been seen as valuable content, not annoyances. After all, people like to read catalogs - collections of ads - points out Google cofounder Sergey Brin.

The more knowledge Google has about each user, the more it can make the online experience convenient and productive. But that also raises questions of privacy, and threatens to knock a leg out from under the company's "do no evil" edifice. To produce relevant ads, Google's computers must know what content is in the Web pages you visit and, in the case of Gmail, what's in your e-mail. A product to be launched shortly, Google Earth, will show detailed 3-D photos of much of the United States, right down to people's homes. Mr. Brin argues that these photos were previously available and not current, and don't provide enough resolution to threaten anyone's privacy.

Google's rush to put its brand on a slew of online services takes advantage of its "feel-good factor," Beal says. It already offers maps, a shopping guide, and specialized searches, such as news and images on the Web. The approach is similar to the way Richard Branson marketed his Virgin brand across a wide variety of products, he says.

But while it's busy pushing out products, the company doesn't seem to want to maximize its short-term financial gains. It regularly passes up opportunities to make money, Mr. Edwards says.

"Google is a very innovative company, but it's also managed in a very unconventional manner," he says. "We advise [investors] not to assume Google is going to launch any particular product [or try to make money from a product] until they do."

Among the company's quirks: not splitting its stock, which has soared from $85 to nearly $300 in less than a year, to make it more attractive, and not selling ads on its own ultrasimple home page (which contains what has been called the most valuable white space on the Internet). It also encourages employees to spend 20 percent of their time away from their usual work, experimenting with a project of their own choosing.

At a May "factory tour" for journalists and analysts, speakers were introduced with a "fun fact" about themselves. The job title for one employee, for example, is "Spam Cowboy and Porn Cookie Guy." Another, the visitors learned, is so obsessed with his job that he got married on his lunch hour.

The casual, fun-loving Silicon Valley image the company projects is hardly unique, Moore says. But it's combined, somewhat incongruously, with a tough attitude about its secrets - such as the algorithms it uses to index the Web.

"They do run a very tight ship," Beal says. "It's very difficult to get information out of anybody at Google."

But what's really remarkable about Google, Moore says, is how it's been able to stay in its protean "fetal state" much longer than most companies, which rush to define who they are and profit from it. "I think that's a testimony to its founding partners and to Eric Schmidt, who's doing everything he can to keep this freedom as long as he can."

24 June 2005

Capturing a mood


I came back late and tired last night
Into my little room,
To the long chair and the firelight
And comfortable gloom.

But as I entered softly in
I saw a woman there,
The line of neck and cheek and chin,
The darkness of her hair,
The form of one I did not know
Sitting in my chair.

I stood a moment fierce and still,
Watching her neck and hair.
I made a step to her; and saw
That there was no one there.

It was some trick of the firelight
That made me see her there.
It was a chance of shade and light
And the cushion in the chair.

Oh, all you happy over the earth,
That night, how could I sleep?
I lay and watched the lonely gloom;
And watched the moonlight creep
From wall to basin, round the room,
All night I could not sleep.

- Rupert Brooke

23 June 2005

If a picture is worth 1000 words

... then what is the revised worth of that picture, if eight words are added?

In the case of Robert Weber's cartoons (a regular feature of the New Yorker), that worth increases exponentially. In this cartoon (below), there are many items Weber leaves unsaid, and yet the mind quickly fills in the blanks. Simply magisterial.

[Cartoon (c) Robert Weber]

22 June 2005

A statement of purpose...

... re my thoughts about Google/GOOG.

Despite its self-aggrandizing nature, I perceive myself to be the “original Google bull”. (During moments of weakness, I consider highlighting this fact on the blog’s frontis). Whereas all other 'analysts' repeatedly bare their (analytical) claws, I loudly, repeatedly, and clearly propound the case for Google/GOOG -- and have done so for months before its IPO. "Buy!", "much higher prices and valuations ahead", and "a singular opportunity". My perception re the opportunity that Google/GOOG manifests has yet to lessen or change in any manner.

So it surprises me when I receive messages such as the following,
"I know that the market is not static and that changes can occur quickly. About 10 days ago you seemed exhuberant about GOOG; now you seem to saying that the sky may fall soon. What gives?"

There are two likely answers for this misperception...
1) The reader has visited this blog for only the past 10 days -- which is altogether possible with the new visitors each day brings.
2) Any reader's option to confuse my wild-eyed bullishness for the long term with the need to rein in the overwhelming bullishness that then was occurring in the short term . (It was becoming a tad crowded there for a while, what with all those suddenly converted bulls!)

It never ceases to amaze me that most investors require certainty and validation; however, I do not. Let's face facts: for most investors, a rising price serves as ratification of their analysis, so they act late. For example, why are most investors seemingly congenitally unable to see what occurs in the chart action of AAPL? What is it they require before they finally act? (Yes, I know, a move above $65, which translates as their finally buying at ~$70. Hmm, price as both value and signifier; interesting but potentially misguided.)

My extreme bullishness re Google/GOOG as a "singular opportunity" remains. As an investor, however, I acknowledge that some moments to buy -- expressed as a function of time, not price -- are better than others. I recognize that different constituencies gain primacy at various moments within any stock's life cycle; Google/GOOG, singular opportunity thought it might be, is no different. And at this moment, the constituency that has primacy are traders, especially momentum traders. So I place GOOG shares -- not the company -- within the context of this reality; knowing that this part of its lifecycle, its moment in the sun, has a different set of realities that constitute value and opportunity. In fact, I 'warned' ~2 weeks ago that GOOG would likely trace out a short term base between $300 and $250 (this anticipated low can be amended to $265); not a bad 'call' -- so far. Of course, the earnings news to be released on 21 July, 4 weeks from tomorrow, should prove notable. Has Wall St managed to 'catch up' with Google's - the company, not the shares - powerful set of dynamics? (Unlikely...) It would not surprise me were GOOG shares to continue its short term base for the next 3-4 weeks while the market digests the previous price rally so as not to cause indigestion. The coming earnings report might provide another positive surprise, and if that occurs, then watch for a sudden, material upward move in price -- well above $300. We shall see.

Even though I say so myself, the archives of this blog are a treasure trove; perhaps reading them might offer a true representation of my thoughts re many topics, in addition to those re Google/GOOG.

20 June 2005

Barrons 'Q&A' re Google

Google's Value? Search Me!

ONE OF GOOGLE'S MANY UNIQUE BUSINESS practices is its flat-out refusal to provide Wall Street with any help on how to model the company's future financial performance. Google (ticker: GOOG) offers no quarterly or annual earnings guidance and declines to give any details on the direction the business might take in the months and years ahead. As a result, making forecasts about the company's profits -- and stock price -- involve inherent peril.

Last year, for instance, we ran a chart that looked at the attempts of 19 Internet stock analysts to value the stock ("Value Quest," Nov. 29). As it turned out, all of the analysts willing to offer price targets were dramatically too conservative; some were off by 100%. To no small extent, the analysts totally underestimated the rate at which Google's revenues and profits would grow. As the adjacent chart shows, the Street in recent months has had to sharply ratchet up their expectations for the company, providing a springboard for the soaring stock.

Nonetheless, the recent surge in Google's stock price to nearly $300 a share, and a subsequent correction of nearly 8% to about 277, underlines the Street's continued inability to reach any kind of consensus on what Google might be worth -- or even how to go about trying to figure it out. If you're looking for a definitive answer, you're on your own. But before you put pencil to paper, or cursor to spreadsheet, I offer you a few facts, in the form of a question-and-answer session, conducted just 10 minutes away from Google's headquarters, in my cozy Palo Alto office, with myself.

Q: Let's start with some basics. What kind of company is Google, really?
A: Well, Google thinks of itself as a technology company. But from the standpoint of where it generates revenue, it's a media company. Purists argue Google can't be a media company, since it doesn't produce original content. But Google sells ads for a living. So it's a media company.

Q: OK, so how big is Google? And how fast is it growing?
A: In 2004 Google generated total revenue of $3.2 billion; but that includes something called "traffic acquisition costs" -- payments made for Google ads that run on other sites, which anyone who tracks the stock strips out. After TAC, revenues came to $1.96 billion, which was up from $939 million in 2003, $345 million in 2002 and $86 million in 2001. Oh, and by the way, they're hugely profitable: Pro forma profits before stock compensation, the way the Street tracks it, totaled $2.73 a share, up from $1.28 in 2003.

Q: Ancient history. What about 2005?
A: The Street consensus -- it's more an average than a consensus -- calls for revenues this year of about $3.6 billion, with profits of $5.21 a share. And since I know you're going to ask, the 2006 estimates call for revenue of $5 billion and earnings of $6.62 a share. But please keep in mind that the Street doesn't really know anything, since, as I said, Google won't help them with their models -- in Google's first few quarterly reports, estimates have been way too low.

Q: Because there's no guidance.
A: It's more than that, David Edwards, an analyst at American Technology Research, says. "Google is managed in an unconventional manner," he says, " so you can't assume they will do things other companies would do." Edwards notes, for instance, that Wall Street might like to see Google sell ads on its home page -- but it doesn't. "So you have to make double assumptions. You don't know what the company is doing, and you don't know the motivations of management."

Q: Nonetheless, this is a wondrous stock.
A: Indeed. The stock has more than tripled since it came public at 85 in August 2004; for the year to date, the stock is up about 43%, or more than 80.

Q: So what about valuation?
A: Based on 2004 numbers, Google trades for about 40 times revenues and roughly 100 times earnings. Of course, no one uses those numbers. Using 2005 estimates, you get 22 times revenues and 52 times earnings. Things look more reasonable if you use 2006 estimates, which translate to 16 times revenues and 41 times earnings. If there were 2010 estimates, the stock might actually look cheap.

Q: Yeah, right. Let's talk about the market cap.
A: At 277 a share, the stock is worth about $77 billion; when it peaked a little shy of 300 earlier this month, the market cap topped $80 billion, triggering all this hand-wringing about how the stock was now the world's biggest media company, ahead of Time Warner (TWX). (Time Warner last week had a stock-market cap of $78 billion, but it also has $20 billion in debt, so it never really was a fair comparison.)

Q: So what?
A: Google, which barely even existed during the Internet bubble, now ranks as one of the 50 largest U.S.-traded companies by market cap. Last week Google's $77 billion valuation made it almost the exact same size as Abbott Laboratories (ABT), which should do $24 billion in revenues this year, and nearly as big as United Parcel Service
(UPS), which this year should rake in $44 billion in revenue. Time Warner? Figure on $46 billion this year, about 13 times what Google will do.

Q: How about comparing Google with some other media companies?
A: It's a useful exercise, if only because it shows why Google holders might not want the stock viewed as a media company; those companies tend to trade at about twice annual revenues. Tribune (TRB), which should do $5.7 billion in revenue this year, has a market cap of $11.3 billion. Gannett (GCI) has a little higher valuation, $18.5 billion, compared with expected revenues of $7.6 billion. Clear Channel (CCU) gets a lower valuation, a market cap of $16 billion on expected revenues of $9.4 billion.

Q: But Google is growing a lot faster, and so is the market it serves.
A: Certainly true. According to Forrester Research, total U.S. online advertising and marketing spending in 2005 should hit $14.7 billion, up from $12 billion in 2004. (The Internet Advertising Bureau puts the 2004 number at a more conservative $9.6 billion.) By 2010, Forrester predicts, the total should reach $26 billion. So Google trades at about three times the entire domestic addressable market five years out.

Q: What about competition?
A: There's plenty of that. In search, there's Yahoo! (YHOO), of course, and Microsoft (MSFT) and AOL, which is shifting its focus to free sites on the Web, finally. Plus hordes of smaller players and some strong regional players, like Yahoo! Japan.

Q: But Google rules the roost at this point.
A: In search, it certainly does. In the March quarter, Google represented about 50% of total search queries globally, with about 36% of the domestic market and 60% or so internationally, according to comScore Media Metrix. By the way: JMP Securities figures Google already gets about 39% of its gross revenue from outside the U.S., and the figure seems likely to grow.

Q: Let's get down to the nitty-gritty. What's the stock worth?
A: Search me. Lately, the Street has been lifting its price targets to well north of 300; among the highest I spied was the 360 target from Citibank Smith Barney. But before you bet the ranch on the accuracy of that prediction, keep in mind that in November, the same firm was using a price target of 170.

Q: Could it get another $100 higher?
A: Sure. Google has had a habit of blowing away earnings estimates, and as long it keeps doing that, the stock could go a lot higher. But then what? When Henry Blodgett made his famous $400 call on Amazon, the stock got there in a hurry. Now it's 35.

Q: OK, they could beat estimates. But how do they keep up the rapid growth?
A: Google is trying to spread beyond search into display advertising, for one thing. And there's rampant speculation on what else they might do. Ask around, and you get a lot of theories. How about a browser? Or an instant messaging client? Or an electronic payment service to compete with eBay's (EBAY) PayPal? Or maybe they can provide search and targeted ad services for Comcast's (CMCSA) video-on-demand service. Google's not saying, so feel free to speculate. Keep in mind, though, that Google is not the only company that's noticed the opportunity in monetizing search. "If you look 25 years out, it's just endless," says Charlene Li, an analyst with Forrester Research. "But the same is true for MSN, AOL and Yahoo!. Google got off to a flying start in the absence of competition. They'll have to fight for every single incremental increase in

Q: So what could go wrong?
A: Well, the industry could slow down, as it did after the bubble burst. Marianne Wolk, an analyst at Susquehanna Financial, last week trimmed her second-quarter revenue estimate for the company to $832 million from $856 million, after "channel checks" found slower-than-expected growth in Europe, particularly in the travel and financial-services categories. David Edwards, an analyst at American Technology Research, pointed out in a research note earlier this month that the total number of search queries in April fell 7.6% from March. Fathom Online, which tracks prices for key words sold by search engines like Google and Yahoo!, reported that prices in May fell 15% from April, with declines in all major categories other than automotive. TNS Media Intelligence reported just a 4.4% increase in U.S. ad spending in the first quarter, slower growth than in any quarter in 2004. The question is whether any of those things are any more than anomalies. We'll see.


Google may be worth $30 or over $300 a share, but whatever numbers you believe, the stock has a lot more risk and a lot less upside at its current exalted level.

Q: What's the worst case?
A: John Hussman, proprietor of the $1.7 billion Hussman Strategic Growth fund, wrote a column on his Website last week that theorized Google would be more appropriately valued at $30 than $300. "I'm happy to concede that if Google's current revenues and profitability are only the beginning, and can grow at very high rates for very long periods of time, then the stock might be worth $300," he said.

"But my argument is that those assumptions are absurd. Even though the company's free product is very good, it's not defensible in any particularly strong way. In Economics 101, we teach that the only way a company can secure a profit is to have a product that is not only useful, but also kept scarce in the sense of not having constant new entries and competition. And one thing that's certain is that valuing this company at one-fifth the value of General Electric (GE) will draw a lot of very intelligent competition. It's going to be a lot of fun to see how many competitors enter this field in the next couple of years. Nothing draws innovation like this sort of market capitalization."

Q: Hussman sounds a bit radical.
A: He has a point. With a 50% gain, the stock would be about the same size as IBM or Intel. A triple would make it one of the five highest market-cap companies in the world, a tad under Microsoft, which has 10 times as much revenue as Google. The bottom line is, at $80 billion, the risk in Google shares has grown. And the upside ain't what it used to be

Google/GOOG: Various items

A) Google, the stock...
Can Google's stock gains continue? See Rachel Beck's column.

B) Its valuation...
1) Barron's discusses Google, saying that the the recent surge in Google's stock price to nearly $300 a share, and a subsequent correction of nearly 8%, underlines the Street's continued inability to reach any kind of consensus on what Google might be worth, or even how to go about trying to figure it out. The company surely is growing fast, as the Street consensus calls for revenues this year of about $3.6 billion, with profits of $5.21 a share. And the '06 estimates call for revenues of $5 billion and earnings of $6.62 a share. Based on '04 numbers, Google trades for about 40x revenues and roughly 100x earnings. Using '05 ests, those are 22x revenues and 52x earnings. Things look more reasonable with 2006 estimates, which translate to 16x revenues and 41x earnings. If there were 2010 ests, the stock might actually look cheap.

Google is trying to spread beyond search into display advertising, for one thing. And there's rampant speculation on what else they might do. "If you look 25 years out, it's just endless," says Charlene Li, an analyst with Forrester Research. "But the same is true for MSN, AOL and Yahoo!" Google got off to a flying start in the absence of competition. They'll have to fight for every single incremental increase in rev. With a 50% gain, the stock would be about the same size as IBM or Intel. A triple would make it one of the 5 highest market-cap companies in the world, a tad under Microsoft, which has 10x as much revenue as Google. The bottom line is, at $80bn, the risk in Google shares has grown. And the upside ain't what it used to be."

2) John Hussman (again):

C) Its (assumed) online payment service...
1) The WSJ says Google plans to offer an electronic-payment service that could help the co diversify its rev and may heighten competition with eBay's (EBAY) PayPal unit. Exact details of the search co's planned service are not known. But the knowledgeable people say it could have similarities with PayPal, which allows consumers to pay for purchases on Web sites by funding electronic-payment accounts from their credit cards or checking accounts.

2) Several firms are commenting on rumors that Google is working on a PayPal-like payment system and has been testing it with some e-commerce players already...

a) Piper Jaffray says their weekend checks indicate this assertion is likely to be accurate and that Google may launch this product in time for the holiday season. Regardless of the initial success of the product, they believe such a launch would likely negatively impact EBAY shares and could be a positive catalyst for GOOG...
b) UBS says their take is that this is indeed a real possibility, but it is far from definitively moving ahead, with the timing and other details unknown, and there may be other reasons for raising the issue now. After speaking with Scot Wingo of ChannelAdvisor, they believe his assumption is driven by discussions with retailers that may potentially use the service. Google would not speak on this, nor could the firm find retailers willing to discuss it.

3) Brad Hill says "the pseudo-news about Google’s online payment service is a cut above the usual rumor mill if only because the story broke (no reg req) in the Wall Street Journal. And why shouldn’t Google compete directly with eBay’s PayPal? I only hope Google doesn’t call the new service Google Wallet as reported—it makes me uncomfortable when Google flagrantly imitates Yahoo!. Let’s call it GooPal for now.

"Some observers have wondered if Google Auctions can be far behind, forgetting that Google is already deeply involved in the auction business via AdWords. One simple implementation of GooPal would be as the transaction mechanism woven into AdWords revenue and AdSense payout. But the meaty speculation, it seems to me, lies in whether Google will transform Froogle and/or Google Catalogs from a window-shopping platform to a true shopping platform. (Google Catalogs is currently in a state of neglect.) Now that Google has convinced thousands of merchants to improve Froogle results by submitting jproduct feeds, how big a step would it be to throw a shopping cart into the mix? Here, imitation of Yahoo!’s Wallet-fueled e-commerce platform would be a good thing.

"Given Google’s populist and democratic impulses, I am aquiver with hope that GooPal will become the standard merchant solution for microbusiness. As things stand now, PayPal and an army of competitors offer merchant accounts of varying quality and cost to online entrepreneurs. Google is just the force majeur to tie it all together into a killer merchant app, especially for selling virtual product such as music files and e-documents. Make it turnkey, hands-on, and brain-dead simple. THAT would be stepping well into the future, leaving Yahoo!, PayPal, and every Web host on the planet in the dust. Call it Google Juice."

19 June 2005


Jared Diamond's revolutionary theories about the course of human civilization come to the screen in GUNS, GERMS, AND STEEL: A NATIONAL GEOGRPHIC PRESENTATION, a new three-part television series produced exclusively for PBS. Diamond's Pulitzer Prize-winning work offers a revealing look at the rise and fall of societies through the lens of geography, technology, biology and economics - forces symbolized by the power of guns, germs and steel. The series airs on PBS Mondays, July 11-25, 2005. Check local listings.

The production spans five continents and uses epic historical re-enactments to illustrate Diamond's theories, explaining why societies developed differently in different parts of the world - why some became conquerors and others the conquered.

Visually compelling, the series uses a widescreen format and features footage from such richly diverse countries as Jordan, Peru, Spain, Zambia, South Africa, Papua New Guinea, the United Kingdom and the United States. GUNS, GERMS, AND STEEL explores the central idea of Diamond's thesis: geography as destiny. Why is it that some countries have so much and others have so little, Diamond asks? What led to the development of sophisticated weaponry, and how did that contribute to the downfall of some civilizations? Why are certain groups of people immune to strains of germs while others are not? And finally, how did all of these factors create the inequalities that still exist in the world?

To seek the answers to monumental questions such as these, GUNS, GERMS, AND STEEL features insight from some of the world's pre-eminent scholars, historians, archaeologists, biologists and anthropologists. The series also travels back in time to look at the origins of human civilization and traces its progress to the present day.

The first episode, "Out of Eden," proposes that a society's potential for advanced development was not determined by race or creed, or by time and experience, but by access to domesticated animals and cultivated plants. Part two, "Conquest," explores the impact of weapons and disease in shaping the conquest of the New World. The final episode, "Into the Tropics," examines the development and colonization of Africa by South Africans and Europeans, and explains why geography is still a factor in forming the divide between those with money and resources and those without.

"This series takes Jared Diamond's key insight - geography as destiny - and explores it through science, history and archaeology around the world. It is 13,000 years of history condensed into an extraordinary intellectual journey," said Michael Rosenfeld, executive vice president, programming and production for National Geographic Television & Film. "Of course, Jared Diamond's thinking continued to evolve after the book was published, and the series reflects his recent efforts to apply his ideas to the modern world."

17 June 2005

Google Mobile

In a message, Google says,
"Since millions of people across the globe already use mobile phones like there's no tomorrow, we're launching Mobile Web Search in many languages. Try it the next time you visit Google on your mobile phone - you'll see a new option to search the Mobile Web. How different is it than standard web search? There are sites out there that have already been designed for your mobile phone, which makes them more navigable on the small screen. So we've created an index specifically for these sites. And so your phone can now be that much more useful."

For the link, please see sidebar (bullets, under "Google").

Google: The engine that runs the world

Finally, someone approaches understanding of the apotheosis Google manifests...
· "...Google isn’t a media company at all. It’s a technology company which happens to do things involving some media..."
· " The combination of extreme profitability and social ubiquity leads to heady talk about the ‘Google phenomenon’... "

· "What’s being ignored in all the hoopla is Google’s underlying strategy, which is to establish the kind of dominance over information handling that Microsoft enjoys over desktop computing..."
· "Google’s business plan ... can be summarised in two words: world domination..."

The Spectator
Issue: 18 June 2005

The engine that runs the world
John Naughton

Google has never had it so good, says John Naughton, and is now set on global domination

Here we go again. As the share price of Google, the Californian search engine, nudged $300, the market capitalisation of the seven- year-old outfit suddenly made it ‘the most valuable media company in the world’. And nothing makes journalists gibber quite like news about media companies. The Sunday Times, for example, burbled that Google was now ‘bigger than Disney. Bigger than Viacom, the owner of MTV, CBS and Paramount’. Bigger even, it seems, than News Corporation, owner of the burbling Times. And, of course, a lot bigger than boring old-economy companies like General Motors.

The only difficulty with this is that Google isn’t a media company at all. It’s a technology company which happens to do things involving some media. And although its current share price excites hacks and stockbrokers, it’s really an artefact of expectations which may or may not turn out to be fevered. We have, after all, been here before — in the years between 1996 and 2000, when irrational exuberance ruled and investors poured fortunes into internet ventures which had neither assets nor profits. Remember, for example,, which burned its way through £80 million (much of it from supposedly sober investors like J.P. Morgan and Goldman Sachs, the Benetton family and Bernard Arnault, chairman of luxury group LVMH) and never even got its website working?

Is Google another one of these bubble creations? Probably not, for several reasons. For one thing, its technology works — which is why most people use it for searching the web. For another, it’s made money virtually from day one. As the web erupted, it was obvious that the volume of information on it would be overwhelming — since you started reading this, several thousand pages will have been added to it — and that there would be a huge demand for tools to help users find needles in such a giant haystack. The challenge was to find a way of making money from this need.

Google’s solution was to devise a search engine that was miles better than its predecessors at turning up pages that were relevant to a particular search; and to figure out a way of making money from delivering those results. In essence, the strategy was to charge companies for ‘AdWords’ — a keyword related to a product or a service. If your AdWord turned up in the pages produced by a specific query, then Google would place a discreet link to your company at the right of the screen. If the searcher clicked on that link, then Google charged you a small fee. At an individual level, this seems like small beer. But aggregate it over countless millions of inquiries a day and pretty soon it adds up to serious money. And advertisers love it because they pay only for results, as it were — which is why companies across the world are now diverting money from their conventional advertising budgets and pushing it Google’s way. As a result, Google’s earnings tripled last year and it made more than $440 million in profit in the last quarter.

The combination of extreme profitability and social ubiquity leads to heady talk about the ‘Google phenomenon’. Socially adventurous New Yorkers are said to use it to check out potential dates before booking the taxi. Undergraduates imagine that doing ‘research’ involves merely looking up stuff on Google and copying what they find. (Fortunately, their tutors can use it to spot plagiarism just as easily.) Socially challenged nerds play games like ‘Google-bombing’ and ‘Google-whacking’. The former involves arranging a set of web-pages so that a particular search gives a desired result. (The first recorded case led a search for ‘talentless hack’ to turn up the home page of a targeted individual.) The second is a more innocent pastime — devising a one- or two-word inquiry that will result in a single ‘hit’.

So far, Google has had an easy ride. The geek world loves its technical excellence and its breezy, sod-you informality. When the time came to float the company on the stock market, its co-founders, Sergey Brin and Larry Page, spurned the traditional method of using investment banks to place shares with clients and went for a Dutch auction which allowed ordinary people to subscribe. This enraged Wall Street, whose analysts promptly wrote down the shares and opined that the offer price of $85 was too high. Now, with the share price standing at $282 and forecast to go higher, they are singing a different tune — as indeed are the rest of the media generally.

What’s being ignored in all the hoopla is Google’s underlying strategy, which is to establish the kind of dominance over information handling that Microsoft enjoys over desktop computing. For the past five years, Google has been recruiting the smartest scientists and engineers in the business and they have built what amounts to a massive supercomputer — a huge cluster of Linux machines which enables the search engine to consult an index of perhaps eight billion documents and instantly find (and rank) those which match the query. No other company has computing power on this scale and, in fact, no other organisation possesses the expertise to run such a huge system so efficiently.

This technological infrastructure is significant for two reasons. The first is that it enables Google to offer all kinds of other services — image searches, shopping comparisons, news, discussion groups, a blogging service and, recently, an amazing mapping service ( — with performance and scale that nobody else can match. The second reason for the cluster is that its existence raises the bar for potential competitors. Google’s co-founders are trying to ensure that nobody does to them what they did to their predecessors like AltaVista.

Google’s business plan, like Microsoft’s, can be summarised in two words: world domination. In 1975 Bill Gates set out his vision of ‘a computer on every desk and every one running Microsoft software’. Si monumentum requiris, circumspice (as Christopher Wren might have said). Google’s declared mission is ‘to organise the world’s information and make it universally accessible and useful’. By this the company means all the world’s information. At the moment, for example, it is funding a massive project to digitise the entire text of the books in some of the world’s greatest libraries. When complete, a search will enable online perusal of any text that is out of copyright and selective browsing of copyrighted works (something that worries some academic publishers). In a networked world, Google’s role as the gateway to online information could give it tremendous power. We all know what power does to those who wield it. And if we don’t, a Google search for ‘power, acton, corrupt’ will find 205,000 relevant pages in 0.34 seconds.

John Naughton is the Observer’s internet columnist.

16 June 2005

Was that so bad?

Over on another thread, Ron and I have discussed trading vs investing, strategies and tactics, etc. Ron then asked, "... how about ANF and GOOG... Are you concerned about a correction of a 1/3 or more?"

Money management offers not only the answer, but is critical in the quest to achieve consistent success. This is due to two primary demons that plague each investor, especially at the onset of his or her career. These are:
1) Fear of the market;
2) Not trusting one's self to do the right thing.

The following snippet is from a reader across the table who gets it...
"Thank you for showing your trading discipline and leadership in your blog. It's great. I've found that in formalizing my own trading rules, setting goals, keeping a trading journal, studying my trades, setting stops, exit points, etc. etc., I'm doing much better and feeling confident about it. And, this is the clincher, my ability to understand what you're saying has greatly expanded. It's like that question that someone asked about position sizes for GOOG; like you said, simply, it was a money management problem. Being that I formalized my money management rules for myself I immediately understood the nature and substance of your reply to him. Sure, the greed percolates inside and you wonder if you should back up the truck. But when you hold it up against your trading criteria, then..."

When the investor achieves a minimum level of self-knowledge -- such as the Deipnosophist reader I quote above -- then he is one step closer to conquering those two demons. Another step on the path to consistent success is pattern recognition. F
or example, during the second half of March, while I warned that Apple/AAPL was a top, most investors instead screamed, "Buy!" The day last month (11 May) of the low trade (so far), I identified Apple/AAPL's correction had ended, and the building of the new intermediate term base had begun. Unfortunately, those same investors who said earlier to buy now see only parlous times. Go figure. (In fact, I have: it seems most investors are wholly unable to see past the obvious trend; for them, price movements appear chaotic, random. Why don't they - and all investors - invest some time learning to recognize patterns? It is so worth the effort.) The Apple/AAPL decline from high to low was approximately (your) 1/3. And as the base now builds I ask, "Was that so bad?"

Learn your fears, and then confront them. I had recommended Websense/WBSN, and all appeared mostly fine -- until yesterday...

[click to enlarge]

The circled area 1 betrays little relative volume during the price advance; although disconcerting, the lack of volume at this stage of its pattern is not critical. More disconcerting, however, was the new recovery high achieved intra-day yesterday (Wednesday) before the shares reversed, and closed near its low trade (see bar 2). This bar qualifies as a key reversal day - the high and low are outside the high and low of the prior three days. These two items are not the only bearish items but all are short term in nature; this pattern has yet to be despoiled. Nonetheless, as a direct result of yesterday's action, I immediately sold my shares this morning (Thursday) at $55.25, making ~5% for ~6 weeks worth of 'work'. For those who wonder, "What next?", I could create any number of scenarios, but will limit to the most bullish: the shares open down Friday morning, plunge into the $51-49 zone (with solid support at ~$51.50), reverse, and then close at a price higher than today's close. If that scenario begins to unfold, without hesitation I would buy back the position.

You wonder whether Google/
GOOG, too, is ripe for a decline of "1/3". At this specific moment I see zero signs of a reversal in any periodicity. In the future, this spate of price weakness since its high at $300 will be seen as a mere speed bump. Do not misunderstand: Google/GOOG will correct by 30-50%, albeit not yet, as it still is in the throes of a primary move to higher prices -- punctuated, of course, by bases within the lesser periodicities. I must remind you, however, of the differing strategies of investing and trading; a trader should not hold during a correction of 30% or more, whereas the investor should embrace the inevitable and frequent 30-50% corrections. (Regarding Google/GOOG, I am an investor, which means...)

This process of investing (vs trading) is more than a matter of perspective and inner fortitude; I hold up as Exhibit 1 Johnson & Johnson/JNJ, the poster child for long term investing in growth companies. Take a good look at its long term chart (date back 30 years, at minimum); JNJ has suffered many, many 30-50% declines, and each was an opportunity to buy. Today the shares are within a hair's breadth of its all time high set mere weeks ago, and are a darn good buy right now. An investor (read: me) can hope that Google/GOOG might proceed along a similar path; if not for 30+ years, then for 5-10 years. We shall see.

Re Abercrombie &Fitch/ANF. The shares closed today at another all time high. Of course, this move could be explained away by the news that the AG Edwards analyst upgraded ANF to Buy from Hold with a $97 tgt. (How close that is to my price target! Is comfort to be found in the similar target from two analysts, one fundamental and the other technical?) The AG Edwards analyst sees continued good times ahead in terms of ANF's comps, earnings, and stock price. He says ANF is on a roll on the strength of a continued surge in denim sales and superb merchandising, and that strong comps will continue for some time. Although a decline of "1/3" could occur at any time, there is nothing in its current pattern and setup that says such a decline would materialize before this new primary move to higher prices exhausts itself.

I have studied the markets for almost 40 years. I have learned many items, including
1) That fear not only is irrational but debilitating;
2) That I might have zero control over the market, but I do have control over my actions;
3) That there exist four critical aspects when reading a chart: price, volume, pattern, and trend.
4) That we purchase shares to sell later at a higher price; we should focus our efforts to that objective.
5) That declines of 30-50% occur frequently, with almost cyclic regularity; they are not to be feared, but embraced. Use them, as trader or investor, to time your entry.
6) To purchase quality, never dreck. (Dreck has a smaller pool of interested buyers.)
7) That we get what we pay for: cheap stocks are cheap for a reason, expensive stocks are expensive for a reason.

One method of dealing with volatility - or the fear of volatility - is to down-size the purchase; whether you acquire your positions via a $-basis or a share-basis, cut by the level that feels comfortable for you and yet allows you to participate. There are other methods of money management, learn them. All aspects of investing -- fundamental and technical analysis, money management, and self-knowledge, etc -- manifest as a piece of the puzzle, a tile in the mosaic. In the end, we grapple more with ourselves and our fears than we do with the market. While suffering a decline of 30-50% is not recommended, that is small change compared to the unlimited psychic damage we each can inflict upon ourselves. The losses on that path are far more damaging... and far more costly.

Who Will Google Buy Next?

I hope my recent posts re Google/GOOG have helped to tame the animal spirits that have been snorting about here of late -- especially in light of its recent price weakness! (And particularly so at its moment of ebb tide today.) Meanwhile, Google the company continues to march along. For example, the poster at "Kuro5hin" says...

"Google is the new Internet behemoth, snatching up small companies left and right. So, in this article, I ask: what tech gems are in the running for Google's growing subsidiary menagerie? To help predict, I will first take a look at who Google has acquired in the past and what Google has done for them, and then I'll throw out a few possibilities for Googlification and discuss where they might fit into Google's strategy."

Read the the complete article here.

15 June 2005


One week ago (Tuesday, 7 June), I mentioned here that I was swapping an over-valued, Men's Wearhouse/MW for the comparably under-valued, Coach/COH. (I base this specific notion of valuation solely on share momentum.) Good thing, too, as MW begins to slacken its pace of gain (in fact, turning down) whereas COH gathers a head of upside steam.

Coach/COH is a designer, producer and marketer of modern American classic accessories, handbags, women's and men's small leather goods, business cases, weekend and travel accessories, outerwear and related accessories. Together with its licensing partners, Coach also offers watches, footwear, eyewear and office furniture with the Coach brand name. Coach's products are sold through a number of direct to consumer channels. That is, when I identified three months ago the chicken cyclicals as leading sectors, the retailers as a group were themselves led by the specialty retailers. Consider the earlier recommendations: AEOS, BEBE, JOSB, MW, TBL, URBN, etc -- each upside leaders by blowout proportions. Coach/COH is part of the same leading group, and in fact one of its leaders. And you know how I feel about the market's leaders!

IBD's Stock Checkup Analysis (see graphic below) shows Coach/COH with an overall rating of A, which is in the 95th percentile of all stocks in the Investor's Business Daily database. The overall rating is calculated using five proprietary ratings that measure each stock's Technical and Fundamental qualities and the Technical and Fundamental qualities of the industry group that it resides in, as well as a rating on the stock's current price attractiveness.

Coach/COH receives a Technical Rating of 88, which places it 9th out of 48 stocks in the Apparel-Clothing Mfg group.

Coach/COH receives a Fundamental Rating of 97, which places it 1st out of 48 stocks in the Apparel-Clothing Mfg group.

Coach/COH receives an Attractiveness Rating of 92, placing it 6th out of 48 stocks in its group.

The Apparel-Clothing Mfg group's technical rating of C ranks it in the 66th percentile of the 197 different Investor's Business Daily Industry Groups. The Apparel-Clothing Mfg group's fundamental rating is D+, ranking it in the 53rd percentile of all groups. (Low, but rising quickly! -- dmg)

[click to enlarge]
The chart since its IPO (weekly bars):

[click to enlarge]

Looks good, eh? Of course, some (including me) might argue it appears already to have discounted the good news... until he or she gazes upon the daily chart:

[click to enlarge]

Note that Coach/COH shares build one intermediate term base after another (two such bases are shown in the chart above) -- this has the effect of restraining the traders' animal spirits and not allowing for an excessive valuation, either fundamentally (a 6 month base typically includes two quarters of earnings reports; in the case of Coach, excellent earnings!), or measured by share momentum. I always have said that a stock has its own life cycle, many times distinct from what occurs at the parent company. For Coach and COH, to date the two rise in tandem.

As you know, I already am long one lot (at a correct $31.75; I mis-spoke earlier), and hope to purchase a second lot as it probes former resistance at $30. As occurred yesterday with ANF, such an opportunity appears increasingly unlikely. My intermediate term objective is the low-$50s. We shall see.

14 June 2005


As you know, I prefer to focus my attention (and monies) on the market's leaders. One sector that leads the market are the chicken cyclicals (as discussed here during March and April); among several, one group that leads this sector today are the retailers.

Abercrombie&Fitch/ANF is among the leaders in the retailing group. ANF is a specialty retailer that operates stores selling casual apparel, such as woven and knit shirts, denim, graphic t-shirts, shorts, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie, Hollister, and RUEHL brands.

IBD's Stock Checkup Analysis (see graphic below) ranks Abercrombie & Fitch/ANF with an overall rating of A+, which is in the 99th percentile of all stocks in the Investor's Business Daily database. The overall rating is calculated using five proprietary ratings that measure each stock's Technical and Fundamental qualities and the Technical and Fundamental qualities of the industry group that it resides in, as well as a rating on the stock's current price attractiveness.

Abercrombie & Fitch/ANF receives a Technical Rating of 97, which places it 7th out of 62 stocks in the Retail-Clothing/Shoe group.

Abercrombie & Fitch/ANF receives a Fundamental Rating of 97, which places it 5th out of 62 stocks in the Retail-Clothing/Shoe group.

Abercrombie & Fitch/ANF receives an Attractiveness Rating of 98, placing it 4th out of 62 stocks in its group.

The Retail-Clothing/Shoe group's technical rating of A ranks it in the 96th percentile of the 197 different Investor's Business Daily Industry Groups. The Retail-Clothing/Shoe group's fundamental rating is C, ranking it in the 62nd percentile of all groups.

[click to enlarge]

The chart below shows all trading for ANF since its IPO -- and the breakout from the massive 6 year base (January 1999 - January 2005). ANF shares, subsequent to that breakout, consolidated those gains.

[click to enlarge]

Let's zoom in for a closer look...

[click to enlarge]

After its big base breakout at ~$51, ANF shares reached a high of $60 but mostly traded sideways in an intermediate term base between $60 and $51. This action served to confirm the axiom, "Once resistance, now support". Purchases made as close to the low-$50's represent a low risk entry, akin to purchasing a growth stock at value prices (Hmm, how can I make a statement like that...?) -- even though those prices are close to all time highs!

Volume is a critical component of discerning which stocks are market leaders; the average daily volume for ANF amounts to ~1,800,000 shares traded/day. This heartens me, as it indicates sufficient liquidity to interest institutions, and act as a sponge for their investable assets when they decide to make a full-on group or sector bet.

Approximately two weeks ago (Thursday, 2 June) the company reported net sales of $159.0 million for the four-week period ended May 28, 2005, a 43% increase over last year's net sales of $111.5 million for the four-week period ended May 29, 2004. May comparable store sales increased 29% over the same period last year. Year-to-date, the Company reported a net sales increase of 35% to $705.8 million from $523.4 million last year. Comparable store sales increased 21% for the year-to-date period. These numbers, released before the markets opened for trading that day, caught the market (literally) short-handed, and thus proved galvanic, providing the necessary thrust for ANF shares to break free of its 4 month base, and reach new all time highs.

This most recent breakout also serves to change the dynamics for ANF shares: they now are in gear to trend higher during the coming weeks and months. Throughout this trend to higher prices will be periods of consolidation, which should take the form of common area patterns -- such as the flag it now builds.

While seeking the opportunity to purchase additional lots closer to $60 (unlikely; more likely is ~$65), I already am long, with an intermediate term objective of ~$100.

More re GOOG

CNET reports, citing sources, that Google is expected to unveil a search engine for Web-only video this summer that will let people preview media clips from its Web site. Google's planned service will let visitors find free short-form videos such as the popular 'Star Wars' video spoofs. The engine will complement the search giant's existing experimental site that lets people search the closed-caption text of television shows from PBS and CNN, among others, and preview accompanying still images. The new capabilities will let people watch roughly 10 seconds of Web video clips for free before shuttling visitors to the video's host site.

Susquehanna notes that, in the near-term, they are somewhat more cautious in their outlook due to greater seasonality overseas than expected. This should mean Google's revenue is in-line with revised estimates when it reports July 21, rather than producing the significant upside seen last quarter. Firm cuts their net rev est for Q2 to $832 mln from $856 mln, essentially in line with the consensus average but below the high-end of expectations near $855 mln-$865 mln. Firm trims their pro forma EPS est to $1.29 (ex stock compensation) from $1.31, as they believe hiring may once again be below expectations, allowing Google to deliver EBITDA margins of 69%, in line with Q1 results.

13 June 2005

Google valuation, part 4

John Hussman chimes in...

For a long while now, John Hussman's obvious intelligence has made a positive impression on me -- (I cannot say the same, however, for his track record).

Here's the thing: you can choose to play up your intelligence and buy what the market does not want to own (in a bid to showcase the differential advantage you offer) -- and your returns will measure that under-performance. Or you can down-play your intelligence and buy what the market, in fact, does want to own. Again, your returns will measure this success. (Or lack thereof -- there are other components to successful investing!)

Not having purchased Google/GOOG, Hussman has given up $200 profit in ~9 months; I daresay he has no other stock in his portfolio that has a similar rate of return, or even close to it. Yes, with out-sized performance comes out-sized risk -- which is a decision each of us must make in advance for our portfolio; i.e., how much risk do we assume to achieve the desired (rate of) return.

12 June 2005

Google/GOOG's valuation, p. 3

With each new all-time high, talk of Google/GOOG's presumed excessive valuation becomes the topic du jour. The clever essay that follows offers an interesting perspective...

The Wall Street Examiner
Friday June 10 2005
GOOG 1,000: Why it’s Possible
by Theodore Mantle

Google (NASDAQ-GOOG) stock has already more than tripled since its IPO. If it does that again, it will be trading near 1,000 dollars per share.

But is that reasonable? Is it likely? Is it even possible, within for example the next three years?

I believe most experienced stock market investors would agree that the first question is irrelevant. As long as the price keeps rising, lucky shareholders have little incentive to sell.

So how likely is it that GOOG keeps climbing to 1,000?

Those who have studied the subject of “heuristic reasoning under uncertainty” are familiar with the concept of “anchoring.” This is a psychological biasing effect that tends to make people adjust their estimates around an existing level, despite other factors that could justify a vastly different estimate.

Estimates of the future stock price of Google have been affected by precisely this kind of bias. When the stock was trading in the 180 range, most analysts were comfortable setting their short-term price targets at 200.

Once it broke above that psychological barrier, targets were quickly moved up to the 250 range. When the stock price hit 250, more calls for “GOOG 300!” were heard. Last week the stock reached a high of 299, and a 350 target was announced by one firm. Today I heard another predict 360.

When the stock was at 180, a target of 200 didn’t seem that crazy, but a target of 360 did. When the stock hit 299, a target of 360 became more psychologically acceptable. But I see very little value in setting price targets that are really nothing more than adjustments of projections to a range near the current price.

To be fair, many analysts waited for the latest earnings report from Google before adjusting their price targets. Google doesn’t provide advance estimates or mid-quarter revisions like most companies. This adds to the uncertainty. After higher earnings were reported, most firms raised their price targets using that information as a justification.

But most raised them only marginally, still clinging to the current price as an anchor.

One notable exception was the highly-regarded Value Line Investment Survey, which dramatically revised its own 3 to 5 year appreciation target to a price range of 385 to 585.

Most analysts don’t look that far ahead, and are afraid to forecast a price that lies too far outside others in the industry, to avoid the risk of appearing foolhardy should the stock suffer a serious correction.

One approach to freeing oneself from the bias of anchoring (in the hope of coming up with a more accurate estimate) is to simply choose another anchor, and then gradually adjust the estimate up or down around that point by considering numerous factors that could affect the price.

How about an anchor price of $1,000 per share for GOOG stock? Before considering if it’s likely, let’s first consider if it’s possible.

Well, on an earnings basis, it is. For the single quarter ending March 31, 2005 earnings were $1.29 per share versus $0.24 per share a year earlier. With the strong growth rate even the current consensus of analysts agree that it’s possible for full-year 2006 earnings (four quarters) to reach $10.00 per share. That would be an average of $2.50 per quarter. If the price of GOOG reached 1,000 the price/earnings ratio (p/e) would be 100. Is it possible for a stock to trade with a p/e of 100? Yes. Genentech’s (NYSE-DNA) trailing 12-month p/e is 100 right now.

What about valuation? With 277 million shares outstanding, a price of $1,000 per share means the market capitalization would be $277 billion. Is it possible for a stock to have that large a market cap? Yes. In fact right now Microsoft’s (NASDAQ-MSFT) market cap happens to be $278 Billion. Exxon-Mobil’s (NYSE-XOM) market cap is $363 Billion. General Electric’s (NYSE-GE) market cap is $391 Billion.

What about dividend yield? Is it possible for a stock to keep going up if it doesn’t even pay a dividend? Yes. Currently 71 of the NASDAQ 100 stocks (including GOOG) don’t pay any dividend at all.

What about book value? GOOG is currently trading at more than 20 times book value, so we know that a price/book ratio (p/b) over 20 is possible. Without increasing that ratio, if the price were to triple again the book value would also have to triple. Is that possible? Yes. Google’s net tangible assets at year-end 2002, 2003, and 2004 respectively were $173 Million, $483 Million and $2,700 Million. So the book value has already approximately tripled once from 2002 to 2003 (before the IPO brought in even more cash). $10.00 per share net earnings in 2006 would potentially add another $2,770 Million dollars in net tangible asset value to the company’s balance sheet, doubling the value in one year. Do it again in 2007 and it’s tripled.

So that’s why, yes, it’s possible for GOOG to reach $1,000 per share within 3 years.

Now, Value Line forecasts a maximum price during that time period of approximately $585. Isn’t that more reasonable? Yes, of course, because a p/e ratio of 100 is very high, even for a fast-growing company. A p/b ratio of 20 is also high. And to believe that the market capitalization can reach $277 Billion is quite optimistic to say the least, since that would put Google in the top 4 of all U.S. companies, right behind Microsoft. So I do think our anchor price of $1,000 is unreasonably high, although possible.

Now then, what is most likely to happen? Certainly we could revise our estimate by further refining our projections of earnings and assets, analyzing competitive risks, constructing hypothetical scenarios for Google’s business growth and considering the relative performance of the overall stock market over the next several years based on our expectations for interest rates, U.S. economic growth, money supply and a host of additional factors that other people have already analyzed ad nauseam.

If we did so, we could arrive at a more reasonable estimate of what “should” happen. I’m more interested in what “will” happen. That depends, as Adrian Van Eck is famous for saying, on what people decide to do with their money.

Psychologically, after riding the NASDAQ 1999 stock market bubble up and then back down, people are scared to repeat that mistake. The current house bubble has many people nervous, especially those who have gotten strung out on “refi madness” debt and are starting to realize that they have to pay that money back. Further mental pressure is mounting from the new tougher bankruptcy laws, which make debt avoidance more difficult. Pension plans are going bust around the country, making that income stream less safe. Social Security is widely known to be broken. Fear of terrorism is still just below the surface.

I think people today are living on the edge and will want to pull out their money at the first sign of any trouble - especially since Google is an internet company and nobody wants to face the embarrassment of being fooled again in that sector.

I expect a small crack in the price of GOOG stock to rapidly turn into a beat-thy-neighbor rush to the exits, with a re-test of 200 likely because that was the level where the latest run began. I don’t know if 360 will be hit before the big break, but I know that once it begins I sure wouldn’t want to be the last one out the door. I’d want to have my running shoes laced up tight and my elbows sharpened.

After GOOG slaps investors in the face, hot money will go elsewhere, and further upside price movement will be slow and labored while all the overhead supply is gradually absorbed from late-comers to the party selling to get out even.

Look at any of dozens of hot internet stocks from 1999 that crashed in 2000 and you’ll see that most of those (that still exist) have yet to recover even half of their previous high by 2005.

So while “GOOG 1,000!” is possible, I don’t think it’s likely. Not even within the next ten years.

Sorry if I got you a little excited earlier on.

As I said, quite clever. I have quibbles, however, with Mr Mantle's thoughts...
1) 'People are scared of repeating their mistake of watching the market go up and then down while they continue to hold' - This has ever been the case; what's new?

2) 'Google/GOOG is in the internet sector' - So, what of it? Unlike 5 years ago, Google makes ever-increasing amounts of money.
3) 'GOOG perhaps falls to $200 before climbing to $360' - It would be folly to deny the possibility of such an event, but so what? Shares oscillate, and a decline from $300 to $200 is proportionate to a $30 stock declining to $20. Would such a decline prohibit that stock to climb subsequently to $100? Check history for similar patterns...

One elliptical reason for my excitement re Google/GOOG can be found in a recent essay by Robert Cringley. This article includes understandable speculation on the part of Cringley because Google is incredibly tight-lipped. Nonetheless, as Cringley suggests, Google has a tendency to "think big". (Cringley's comments below were edited slightly by a Deipnosophist reader "to provide a completely Google context")...

"[Many readers are] doubtful about the idea that [the Google Web Accelerator] is a land grab on Google's part. More likely it is market research or an effort to make Google's own spider programs work better by uncovering previously hidden web real estate. Maybe, maybe not. But Google thinks big and they don't do frivolous public betas.

"What we can say about any public beta from Google is that it is a statement of direction and possibly an effort to influence the future. So let's think a bit further about where this accelerator thing could be going. Let's refine our vision a bit.

"Google just bought land in the Columbia Gorge east of Portland, Oregon -- 30-plus acres with options on additional parcels. What the heck is that for? This is beautiful land outside any major city. Not enough land for a corporate campus, but that's okay, because there isn't much in the way of local housing, anyway. So what's it for?

"It is probably for a data center -- a one million-plus square foot data center that could easily be inhabited by a million or more CPUs. The attraction for Google is reliable electrical power since their new property is not far from one of the many dams and powerhouses that make up the Bonneville Power System.

"Now drop back to the Google Web Accelerator. Yes, it is just one of many Google initiatives. Yes, it can be circumvented in a number of ways. But Google is planning something big, so how could the Web Accelerator be a part of that?

"What did Bill Gates say? That Apple's iPod was at best a transitional technology to be supplanted by mobile phones? Well, it is true that we'll all eventually carry phones. And it is true that we are all wanting more and more information. And it is undeniably true that the current view of the World Wide Web from most so-called "Internet-enabled" mobile phones is pretty pitiful. Enter one possible version of the Google Web Accelerator as an intelligent web interface generator for mobile users. There is no other project I have heard of that could -- on-the-fly -- convert web content for this new interface, which happens to be used by more than a billion people worldwide."

It is easy to seque from the talk of Google/GOOG's valuation to Cringley's thoughts re one aspect of the 'big picture' for the company because Google/GOOG is more than merely another stock investment (expressed as its financials), more than just another company (its place within its sector and the economy); au contraire, in my reckoning Google manifests as the vanguard of the changes society itself demands, and has wrought. It represents the apotheosis of all these trends.

Although the stock is not the company, its reality as apotheosis should help propel its share price higher for some time yet... punctuated, of course, by periods of skittish stock behavior. (It would not surprise me to see the shares trade between ~$300 and $250 -- if it even declines that low -- for the next several weeks, as it traces out a short term base prefatory to another leg higher. Only the fullness of time shall reveal the final shape of its pattern.) Please understand: although the topology is (and will be) rocky at times, it is generally uphill. Even from current levels of price and valuation.

Questions? Comments?

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