By Brian Nelson, CFA
The equity markets are an interesting beast. In October 2012, we pounded the table on adding Google (GOOG) to the Best Ideas portfolio (see email transaction alert archive here), which followed the September 2012 edition of the Best Ideas Newsletter, where we highlighted the company as the latest example of the power of the Valuentum Buying Index (see edition here), our stock-selection methodology. Part of the reason why I wanted to bring this up is not to pat ourselves on the back, but instead to reiterate the importance of ‘patience’ and ‘perspective’ in investing, regardless of the process you pursue. Let’s look at the following chart of Google from the date of the release of the September 2012 edition of the Best Ideas Newsletter, or September 15, 2012.
Would you believe that some investors were disappointed with this performance? Google has been one of the best-performing stocks in the market since the newsletter was released and since we added it to the Best Ideas portfolio, so how could this be? We think it has to do in part with an investor’s time horizon (expectations) and the overall perspective of the investment (what is material and what is not).
At the very bottom left of the chart, you’ll see that Google fell a few percent shortly after we highlighted the idea in the newsletter edition. The fall was enough for some investors and members to become disappointed. However, looking back, you’ll see that the move lower was immaterial at worst and normal at best in the context of Google’s future performance. In the case of the Valuentum Buying Index, capturing the entire stock pricing cycle from a 9/10 to a 1/2 takes time (typically between 6-18 months but longer in some cases). Not only this, but no stock is going to go straight up from the moment it is purchased—a 5%, 10% or even 15% fall should be within the realm of expected possibilities after putting new money to work on an investment idea.
Gaining perspective by looking at the chart is one of the key ways to mature as an analyst, financial advisor or individual investor. To gain a birds-eye view of the company’s stock price performance, please take advantage of the TradingView charts we have embedded on each company’s landing page (see here for Google). By putting your cursor over the chart, you can zoom in and out by using the scroll wheel on top of your mouse, or if you don’t have one, you can click on the + or – signs on the chart itself. For example, having perspective will help you understand whether a stock price fall of 10% is material (if the company’s fundamentals are troubling) or if the 10% fall is a natural tendency of profit taking.
We had the pleasure of revisiting Google’s fundamentals when it released its fourth-quarter results Thursday. For the quarter, revenue jumped 17%, to $16.9 billion, while non-GAAP operating income advanced more than 13%. Non-GAAP earnings-per-share in the fourth quarter was $12.01 compared to $10.65 in the same period a year ago. Aggregate paid clicks increased about 31% over the fourth quarter of 2012 and advanced approximately 13% over the third quarter of 2013. This pace accelerated versus the year-over-year growth rates in the second and third quarters. Google also announced that it will sell Motorola Mobility, a value-creating move as it will now avoid having to plow more capital into a money-losing endeavor. The search giant continues to be a cash cow and ended the year with cash and cash equivalents of $58.7 billion and long-term debt of $2.2 billion. Google will also be splitting its stock in the coming months.
Valuentum’s Take
We continue to like Google as a core holding in the portfolio of the Best Ideas Newsletter. The company is also a good reminder for members to be patient with the highest-quality ideas. They often take time to work out, and it’s likely that over very short periods of time (weeks), the stock price could work against the methodology. The time horizon for our ideas to work out has traditionally been 6-18 months, but there have been ideas that have taken longer. Please pay close attention to the email transaction alerts that we send to members to announce any changes to the actively-managed portfolios, which continue to perform well.