How You Can Play Google in Spite of High Price
In my view, Google Inc. (NASDAQ/GOOG) is tops in the Internet space, and a better play than Facebook, Inc. (NASDAQ/FB) and Yahoo! Inc. (NASDAQ/YHOO), based on my stock analysis. (Read “Facebook’s Hot, But Valuation’s Questionable.”)
At just over $700.00 a share, you may think the stock is expensive. On an absolute basis, a $700.00-plus stock is not cheap, but on a valuation and comparative basis, Google is still tops, according to my stock analysis.
My stock analysis suggests that Google will continue to dominate and gain market share in the Internet space with its “Android”-powered “Nexus” smartphones and Wi-Fi Internet offering.
Wall Street is optimistic about the investment opportunity of Google. Let’s first take a look at what analysts are expecting. Of the 39 analysts polled by Thomson Financial, 11 rate Google a “Strong Buy,” while 20 analysts rate it a “Buy” and eight rate it a “Hold.”
The most bullish analyst among the group has a one-year price target of $900.00 on Google, versus the mean target of $799.32.
And in spite of its higher stock price, my stock analysis shows that Google continues to attract institutional buying, unlike many of the other major technology companies.
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Institutional investors purchased 220,152 shares over the past quarter-to-quarter, which represents almost a 0.1% rise in institutional ownership, based on information from Thomson Financial. By comparison, institutional investors have sold 4.8 million shares of Apple over the same period.
Short selling is also relatively absent with a mere 17.9 million shares short, or about 1.9% of the float, as of December 31, 2012, according to Thomson Financial.
If you are eyeing Google, my stock analysis suggests that you can wait for weakness to enter, as this has been the recent pattern.
Alternatively, my stock analysis also suggests that you can buy call options as a risk-controlled trade, where the maximum loss if the stock retrenches is known in advance.
For example, my stock analysis indicates that if you feel Google will advance higher within a year, you can buy the in-the-money January 2014 $600.00 call for about $132.10, a breakeven of $732.10 (excluding commissions); this represents a 4.6% increase from the close of January 18, which is realistically achievable. Of course, should Google retrench, you can offset your option position and take a small loss rather than risk the potentially bigger loss by buying the stock, according to my stock analysis.
Chart courtesy of www.StockCharts.com
Moreover, you can buy Google and write a covered call against your position to generate some premium income, while reducing your average cost base. For example, at the current $704.00, you can sell the January 2014 $720.00 call for $62.00. This reduces your cost base to $642.00. If Google fails to break above $720.00 by January 17, 2014, you simply retain the premium of $62.00 per share, and you can roll it over to another month. But say Google moves to $730.00; you would need to sell your position at the $720.00 strike, representing a total return of $78.00 or 11.1%.
Please be advised that these are not actual trading recommendations, but simply illustrations. You can use these strategies for many different situations.