A Picture Is Worth a Thousand Points

The other day we were trying (sorry, I keep jumping back and forth between me, I, and WE, but there are a lot of folk and voices in my head) explain the concern about the general feeling of bullishness with all the talking heads on Bloomberg and the writers of Barron's.

Sometimes when people are talking about how good things are, it is a time to consider taking profits and adding to your core holdings on dips.  Well, the cover of this weeks Barron's is a poster child for a nice correction.

You see, if the big money guys see this kinds of consensus send the market up a tiny bit more, they will take profits and we will see a correction.  Will it take place before the FOMC meeting on the 6th?  Will It take place before the jobs number this week?  Will it take place before the Germany high court decision to go along the ECB planned Euro Support?  These are all good questions that NO ONE knows the answers to, but all worth considering.

We have another day to dally dilly with the crystal ball for this week so we will do so.  Tonight we will enjoy Jack's Birthday. 

We did run another summary on another of our core holdings, GOOG.

2012 9 2 GOOG 

Current $685          Cost Basis $641.00

First Purchased (this go around) 2012 August 10.

Google Inc., a technology company, maintains an index of Web sites and other online content for users, advertisers, and Google network members and other content providers. It offers AdWords, an auction-based advertising program; AdSense program, which enables Web sites that are part of the Google Network to deliver ads from its AdWords advertisers; Google Display, a display advertising network that comprises the videos, text, images, and other interactive ads; DoubleClick Ad Exchange, a real-time auction marketplace for the trading of display ad space; and YouTube that provides video, interactive, and other ad formats for advertisers. The company also provides Google Mobile that optimizes Google's applications for mobile devices in browser and downloadable form, as well as enables advertisers to run search ad campaigns on mobile devices; and Google Local that provides local information on the Web. In addition, it offers Android, an open source mobile software platform; Google Chrome OS, an open source operating system; Google Chrome, a Web browser; Google+ to share different things online with different people; Google TV, a platform for the consumers to use the television and the Internet on a single screen; and Google Books platform to discover, search, and consume content from printed books online. Further, the company provides Google Apps, a cloud computing suite of message and collaboration tools, which primarily includes Gmail, Google Docs, Google Calendar, Google translate, and Google Sites; Search Appliance, a search technology for use within enterprises; Google Site Search, a custom search engine; Google Commerce Search for online retail enterprises; Google Maps Application Programming Interface for businesses; and Google Earth Enterprise, a firewall software solution for imagery and data visualization. Google Inc. was founded in 1998 and is headquartered in Mountain View, California.

How many websites are there?  After doing a little homework the answer is, No One Really Knows.  NetCraft, one of the research companies estimates close to 700 million.  VeriSign guesses about 225 million.  Network solutions, the original internet web site registrar has said over a billion domain names have been registered.

So how did I find all that info?  How do you find these millions of websites?  Of course it is by using Google.  The definition of google is 1 followed by 100 zeros.  I found that on Google too.

Fundamentally, GOOG get's about 80% for their revenue from web word advertising.  If you are looking for hotels in Detroit, you will see advertised websites at the top of the page for Marriot, Hilton, Trip Advisor etc.  The companies pay GOOG a fee for that listing but ONLY if the person clicks through to that site.

This pay for view model is not new, but it is the most selective advertising on earth as the advertiser only pays for those people who have chosen their site implying and intent to purchase.

Their PE ratio is a bit lower then their peers making them a bit of a bargain even at $685.  Price to book, Price to sales, and Earnings per share growth are all within industry norms.  Their revenue growth (3 year avg) is more than twice the industry average.  Operating margin and net margin are very sexy.  They have no debt to speak of.  Their free cash flow is on target to hit 13 billion, which would be an 18% increase over last year.

On the warm and fuzzy evaluation, GOOG is getting ready for the next curve.  They dominate the search engine market (62% and none one else is in double digits) and are now looking for social business enterprises to expand their growth horizon.  They recently purchased Frommer's travel guides and have plans to enter the travel arena.  (Travel is the second most search subject on the internet.  Any guesses what number one is?  SEX)

Though not generating revenue, the launch of the Android software platform is a step to keep GOOG relevant in an Apple dominated world.  Prospects are good for a long tern run with GOOG.

Current valuations peg GOOG to be worth 725-760 a share.  You can come up with your own value by looking at analysts forecast for 2013 estimated earnings and multiply by it current PE of 23.  Either way, 685 is not too much to pay for GOOG.

AGAIN, you could look at March 2013 Call options slightly out of the money at 700 a share.  They are selling for 46 dollars a contract.  In review, you can spend 4600 dollars to control 70,000 dollars of GOOG.  Assuming GOOG comes close to the revenue and profit expectations these call options would be worth 58-60 an option by years end.

Just another way to make a GOOG play.  OPTIONS ARE NOT FOR EVERYONE.  UNDERSTAND HOW THEY WORK.