Wednesday, January 4, 2012

A GOOGlelicious Breakout

Google Inc. (GOOG) has lodged itself so successfully at the heart of the online experience that it's almost inescapable, like air or sunshine or political rhetoric.

Just considering what I do here every day, my life is a googlelicious experience.

The Private Trader weblog is hosted by Blogger, which is owned by Google.

The text documents I use to save my boilerplate, such as the legal disclaimer, are on Google documents, as are the spreadsheets I use for stock picking and other analytical tasks.

My Christmas list is on Google documents.

I share photos of my 17-month-old grand-daughter on Picasa -- owned by Google.

I plan my walks on an online map -- Google -- and thanks to that maps ability to plot GPS positions need never get lost again while exploring the stranger nooks and crannies of my city.

I keep in daily touch from Oregon with my family in Japan using Gmail -- once again, Google.

And when I want to find out about stuff -- such as the property qualification for voting in New York during the American Revolution, I google it, and Google brings the state's 1777 constitution to my fingertips, and a tool needed to translate British pounds of the year to 21st century dollars. It took me about 3 minutes to get info I needed.

And I suspect it is that way for nearly everyone who uses the Internet as a daily tool in their lives.

It is, in fact, a googlelicious world.

All of this screen time has made Google one of the premier advertising companies in the world, with sales of $29.3 billion.

I would expect a company like GOOG to be a rip-roaring bull play, but its longer-term chart shows it to be a mature company, whose stock has basically been sideways since 2009 -- albeit with some very wide swings that could put money in any trader's pocket.

GOOG came out at the top of the 16-symbol bracket that I used to select today's trade. It works much like the college hoops championship. From a universe of 63 bullish picks, ranked using the Zacks system, I selected 16 at random to seed the bracket, and then compared charts.

(See my essay "10,000 Charts" for a full explanation of how my bracket method for analyzing stocks works.)

GOOG was the winner, followed by 2nd place LULU, 3rd place CAT and 4th place IVZ.

I selected it in my out of contests between pairs of stocks because the weekly chart shows a sharp break above the previous highest high, set in January 2011. That alone makes GOOG stand out. Many stocks have had sharp rises over the past two days, but GOOG is outstanding for the clarity of the its breakout.

The stock has been in an uptrend since Oct. 4, when it began rising from a low of $480.60 up to today's high of $670.25, an increase of 39%. The rise was broken in mid- and late-November with a retracement to a Nov. 25 bottom of $561.33. From that point, the price has risen steadily to its present level.

GOOG has the numbers to match its chart. Return on equity is 20%, which is in growth-stock territory by my book. The debt/equity ratio is 0.05, which is quite small and very healthy.

But the price-to-sales ratio is 6:1, which if one considers 1:1 to optimal, means that GOOG is selling for six times its justifiable price.

Institutional ownership is a bit on the low side, at 63%, and perhaps that high price compared to sales is one reason why some institutional players steer clear.

One downside is simply the $600+ price, which puts the 100 shares needed to match a single option contract at $67,500 -- well out of the reach of most individual traders.

GOOG is long overdue for a stock split, and I can only ascribe the lack of a split to vanity on the part of its principal owners, who must love to see their  shares grow to big numbers. (Although GOOG has never been super-cheap. Its lowest low for all time is $95.96.)

Even a single at-the-money June call contract is going for $5,160 -- not awful but its granularity is too large to allow diversified traders to fine-tune exposure.

GOOG announces earnings on Jan. 19 after the close, so any trader entering a long position now should be prepared to hedge it with some way-out-of-the-money puts as earnings day approaches.

Decision for my account: I'm opening a bull position by selling February bull put spreads to capture any near-term rise, but with the intention of closing or hedging with otm puts prior to earnings.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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