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!

14 May 2007

Google/GOOG is cheap

As you regular readers know well, I have been a bull on Google/GOOG since long before its August 2004 IPO. Some even say that I qualify as the Original Google Bull, as I argued in favor of the company as an investment at a time when everyone else proclaimed discouraging words of 'analysis'. I viewed then, and continue to believe, my responsibility to encourage you to buy and hold the shares of Google/GOOG as a true long term investment. (Read the archives for edification, if interested.)

Other 'investors' could continue to buy and sell, but in fact they are traders selling early one of the great growth stocks of our generation. Their loss.

Well, guess what. Google the company has again become cheap, as has GOOG the stock. The company now sells at a forward PE of ~30, which might seem high but not for a growth company, and not for a company such as Google that posts the stunning numbers it does quarter after quarter. Of course, that rate of growth will slow due, if for no better reason, than the Law of Big Numbers. But that is the reason the shares have traded sideways for the past ~18 months!

And that is what makes the stock also cheap. Note in the chart below...

[click on chart to enlarge]

... that this sideways action results in a high level consolidation -- and as such it tags now its trend line of rising bottoms, its continuum. (NB: I tweak these trend lines as new data points emerge. The correlation is to daily volume at important inflection points. Thus, the line as drawn is mere speculation as it violates a cardinal rule of drawing trend lines correctly. I make the assumption - one that I perceive as a good 'bet - that GOOG shares ultimately will trade above its former all time high of $513, and then trend higher. And higher yet.)

This is one post that seems skimpy on the facts, but in truth I have articulated these points repeatedly, so I will not belabor the argument one more time. Why bore you? In fact, now is the time for action, not more deliberation. Now is the time to pound the table: Google is cheap and its shares can be bought at its current price and value for a low risk / high reward entry point.

The proceeding commentary does not equal an upside breakout; i.e, it is not event driven. I would be pleasantly surprised should a breakout occur prior to the company's Q3 earnings report due 5 months from now. This moment does represent, however, a moment to buy.

Argue negatively all you want. Find all the same bearish setups you found all the way up from $85... but note as well that GOOG sells only ~10% from its all time high trade.

I like the opportunity that Google/GOOG represents at this moment, as it trades near its long term rising trend line.
-- David M Gordon / The Deipnosophist

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