Stock Pick (Google) Summary
This will be a page where i will be modifying weekly to update several values like stop trail, relative ratios, ATR as discussed in previous post.
Google as of 01/05/2009
Stock Price : US$393.69
Quantity bought: 17 shares
Price Paid : US$370.69
Total Cost (inclusive brokerage) : $9596.09
Brokerage Fee : $42.77
1R(Downside) = US$762(? of equity)
Highest Price since I entered the trade : US$403.75
ATR(50 day) : 13.925
Stop Trail : 399.82 - (3* 14.805) = 361.975
Fundamental relative valuation as of 01/05/2009
Stock | Industry | Stock's 5Yr Average* | |
Price/Earnings | 29.6 | 26.2 | 67.1 |
Price/Book | 4.4 | 5.9 | 10.5 |
Price/Sales | 7.1 | 5.3 | 13.6 |
Price/Cash Flow | 19.7 | 23.5 | 21.7 |
Dividend Yield % | --- | --- | --- |
Put/Call Open Interest (3 months)
- Based on the chart, it seems there are lesser interest on put options indicating optimism on stock. Might sell in strength later on.
Short Interest (3 months)
- Steep decrease in short interest thus indicating optimism as well.
Buy/Sell/Hold recommendations by analyst
FOR GOOG
| Strong Buy | 17 |
| Buy | 3 |
| Hold | 1 |
| Sell | 0 |
| Strong Sell | 0 |
- Gauge sentiment and potential buying demand. Currently very bullish thus it might be top heavy leading to heavy sell off. Need to take caution in this.
Sentiment gauge (Google)
1. Put/Call Open Interest Ratio
This is the ratio of total put open interest to total call open interest among options with less than 3 months until expiration. Currently the level is quite high thus it indicates pessimism.
2. Short Interest
The short interest has been decreasing consistently over the past few months which indicates optimism
3. Buy/Sell/Hold
FOR GOOG
| Strong Buy | 16 |
| Buy | 3 |
| Hold | 1 |
| Sell | 0 |
| Strong Sell | 0 |
Based on the above, it seems analysts are quite optimistic on Google so the question becomes , is there enough sideline buying demand to support the stock , or is it top heavy.
After reviewing the 3 indicators, I noticed they are sometimes contradicting each another therefore I think this is only at best used to derive a rough gauge of the investor sentiment. I don't think I will put much emphasize on these.
All the above images are retrieved from http://www.schaeffersresearch.com
Reproduced with permission from http://melynn-lynch.blogspot.com
Stock Pick (Google Part 3)
3. Exit Point
Fundamentals
- I will sell Google when its fundamentals has deteriorated like decline in cash flow and also when, I am no longer optimistic on its growth. I will compare the quarterly result against the previous quarters and also the annual result too .. Will probably come up with a list similar to the one I did for entry to decide again. (This will be an exception whereby I will sell off the stock without adhering to my below stop trail set),
- I will also sell Google if its relative valuation like (P/E , P/S) has ballooned excessively.
Momentum
1. Relative Strength
Weaker 3, 6 and 12 month relative strength.. Anything below 50 will be considered weak
2. On Balance Volume
OBV is downward sloping
3. ADX
Anything between 13 and 14 indicates a weak trend
4. Moving Averages
When Occurrences of fast moving averages go below the slow moving average.
5. Trend
- Parabolic move is fully developed (three or more success trend lines)
- Stock price is near vertical
I will asses the above factors weekly and if there's a need, I will consider to sell the stock even when the current price is higher than my pre defined stop loss trail.
Reproduced with permission from http://melynn-lynch.blogspot.com
Stock Pick (Google Part 2)
Momentum - 3/4
Total of 10 points : 7/10
I will only enter f the total points is more than 5.
I will be using a 50d ATR to estimate the volatile and it is currently at 15.137. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
For a start, i will set a 2% risk.
- Find out the ATR
Multiply ATR by 2(static)
15.01* 2 = 30.02
- Derive the position by taking amount to risk divide by the above sum
500 / 30.02 = 16.65 shares
~~ 17 shares.
Stock Pick (Google) Part 1
1. Entry Point
I am assessing the fundamentals based on the materials and analyst reports in MorningStar therefore to ensure consistency, I will be using their fair value estimation as well. They have come up with 2 numbers.. 1) fair value estimate, 2) target price with the margin of safety element. For my estimates, I will be probably using the latter which is at 250 now.
Technicals
Moving Average : Used 3 mv lines (14d,25d and long term 100)... This is still in experiment phase therefore numbers might not be ideal. Note that up to this point, the short period mv line crossed the longer period one which symbolizes a bullish trend.. Curently the price is trading above all three lines which is a bullish indicator
ADX : Currently at 16 which indicates a weak trend.. Strong trend if its above 40. When adx begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.
Based on the above 2 factors, I think this stock may be gaining momentum, consolidating and an uptrend might soon prevail..
Deducting the estimated value from the current , its approximately $119.78 difference.. Its a 47% variance therefore as for now, I think I will track this under my watchlist
2. Position Sizing .
I will be using a 50d ATR to estimate the volatile and it is currently at 15.32. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
Note that there is a 47% variance between my estimated value and the curent price .. Following is a table which I am using to set the risk.
OverValued (Estimated > Current)
<10% variance = 3% risk
>10 % and <20% variance = 2% risk
> 20% and <25% variance = 1% risk
>30 % = wont invest.
UnderValued(Estimated
<10% variance = 3.5% risk
>10 % and <20% variance = 4% risk
> 20% and <25% variance = 4.5% risk
>30 % = 5% risk
Therefore in such a case, I wont invest as the variance exceeds my predefined threshold (30%).. I will only buy if the price reaches my target (Thats assuming, the fundamentals are intact and there's a hint that momentum will be building up soon).
One downside of this is that the valuation is a laggard as this number wont be updated accordingly to the current economic situation.. In the event if I foresee the economic to recover, should I attempt to readjust the valuation accordingly? I shall think about this at a latter stage but for now, I will stick to their valuation rigidly.
Target Price
<10% variance - set 3% risk if the price is between 250 to 275
>10 % and< 20% variance - set 2% risk if the price is between276 to 300
> 20 % variance and <25% variance - set 1% risk if the price is between 300 to 312.5
I will continue my exit point and hypothesis of a good case and worst case scenario in my next post.
Google Fundamental Analysis
Google provides a free search engine for users around the world and generates revenue whenever a user clicks on a text ad displayed alongside the search results. This represents 90% of the company's net revenue. The remaining 10% of net revenue is derived from ads sold on third-party sites and online software. Google is also investing in new business lines including traditional media advertising, the mobile industry, and online software.
Detailed Quantitative Analysis
1. Has the company been generating free cash flow consistently.
Google has a good history of generating free cash flow as shown below.
| Free Cash Flow $Mil | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 118.1 | 218.7 | 658.0 | 1621.2 | 1677.6 | 3372.6 | 5494.4 | 5494.4 |
2.Has the company generated a consistent increase of operating profit margin and net profit margin
Google's operating profit margin has decreased from 30.6% to 30.4% but prior to that, they have been increasing consistently.
Google's net profit margin has decreased substantially from 25.33% to 19.39%
| Operating Margin | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 42.4 | 23.4 | 20.1 | 32.9 | 33.5 | 30.6 | 30.4 | 30.4 |
| Net Margin | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 22.68 | 7.21 | 12.51 | 23.87 | 29.02 | 25.33 | 19.39 | 19.39 |
3. Is the company's ROE more than 10%
Google's 2008 ROE is 16.60 and has decreased over the years..
| ROE | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 76.89 | 31.35 | 22.98 | 23.73 | 23.26 | 21.16 | 16.60 | 16.60 |
4. Did the company increase financial leverage aggressively to get a high ROE
Google's financial leverage is consistent at 1.12 and is quite low for a company that have a 16.60% ROE
5. Is the company's ROA more than 8%
Google's 2008 ROA is at 14.80 and the figure is not quite consistent over the past few years.
| ROA | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 34.74 | 18.24 | 19.07 | 21.57 | 21.41 | 19.19 | 14.80 | 14.80 |
6. Has the company's operating expense increased drastically over the years
The company total expense for 2008 has increased from 29.3 to 30% of sales.
7. Is the company's inventory rising faster than sales
N/A
8. Has the company's receivables percentage of asset increased more than 20%
Account receivables decreased from 9.1 percent of sales to 8.3 percent
Growth
1. Is the company's sales growth more than 15%
Google's sales has grown at an annual growth rate of 71.6% over 5 years.
2. Is the company's operating income growth more than 15%
Google's operating income has grown at an exploding rate of 80.9% over 5 years.
3. Is the company's net profit growth more than 15%
Google's net income has grow at an exploding rate of 100.6% over 7 years.
Financial Health
1. Is the company's financial leverage more than 3
Google's financial leveage is around the range from 1.08 to 1.13. This means that for every dollar in equity, the firm had $1.13 in assets. It borrowed the other 0.13. This is fairly conservative for a company which generates such high ROE.
2. Is the company's debt to equity between 0.5 to 1.5 or smaller.
Google's debt to equity is at 0.03 and always has been this low for the past few years. Close to debt free.
3. Is the company's current ratio more than 1.5 and less than 6
If a company has an excessive high current ratio, it can probably sound some alarm bells because it indicates that the company has a large amount of current assets that could - and probably should - be invested back into the company . Google's current ratio is at 8.03 in year 2008.
4. Is the company's quick ratio more than 1
This figure is not really meaningful if used alone as it needs to be compared with other companies in the same industry but generally, a quck ratio higher than 1 puts a company in fine shape. Google's quick ratio is at 8.03 in year 2008.
Cash Flow
1. Is the company able to generate improving/consistent free cash flow to sales
Google has been able to generate high free cash flow per sales over the past few years.
| Free Cash Flow/Sales | |||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | TTM |
| 26.86 | 14.92 | 20.63 | 26.41 | 15.82 | 20.32 | 25.21 | 14.80 |
Efficiency
| FY05 | FY06 | FY07 | FY08 | |
Receivable Turnover | 11.5 | 10.6 | 9.1 | 8.8 |
Inventory Turnover | - | - | - | - |
Fixed Asset Turnover | 9.2 | 6.3 | 5.2 | 4.7 |
Asset Turnover | 0.9 | 0.7 | 0.8 | 0.8 |
Google's accounting risk is graded by forbes as "Very Agreesive".
For details,go to http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=GOOG
TOP ISSUE
For US stocks, I will use morning's star valuation as a guidance.. Below are the estimated values they derived
Consider Buying : $250
Fair Value Estimate $500
I will use the value under "Consider Buying" to determine my entry point..
