A Closer Look at Google Stock
Alphabet Inc. (NASDAQ:GOOG) took a beating after the company’s first-quarter earnings came out last week. Google stock fell by six percent in just five days!
Markets turned bearish on Google despite solid earnings growth and a great underlying business. I’ve seen the same thing happen to a lot of great companies. The business keeps making more and more money, but the stock plummets.
As I’ll explain today, this happens frequently on the stock market. Even the best of companies can fall prey to a bad narrative. I call them “Myth-Buster Stocks.”
Trading on these “Myth-Buster Stocks” is pretty simply. It takes only two steps, and the gains can be enormous. Let me explain…
- Look for a company that missed its earnings mark
- Stretch your investment horizon
Google stock fell after earnings because the projected earnings were wrong. There was nothing bad about the firm’s performance, but it fell short of analysts’ expectations.
And on Wall Street, there is no greater sin than missing an earnings mark. Capital will flow from your stock like Niagara Falls.
Google had the audacity to deliver $7.50 a share on $20.26 billion in revenue. Shame on them! SHAME! The market was predicting $7.97 a share on $20.37 billion. (Source: “Alphabet earnings: $7.50 per share, vs expected EPS of $7.97,” CNBC, April 21, 2016.)
On a serious note, this makes some sense. Research firms piece together bits of information to form a picture of the company’s business. They build a model and that spits out an estimate. If Sherlock Holmes was into finance, this is probably what he’d be doing.
But then a news agency publishes the median estimate. That’s where things get tricky. Until that point, the predictions were little more than educated guesses. But the weight and cachet of major news outlets transform these guesses into a narrative.
The mainstream media love drama and urgency, so they build the educated guesses into a myth. Instead of this just being one marker in a long road, this earnings announcement is now the most important thing ever. That is the myth: urgency and drama.
They make it seem like the fate of Google hangs on this one announcement. And that level of urgency has consequences. When Google’s results fall short of expectations, they are viewed as a failure. Of course, the stock plunges.
Now the mainstream media gets to write about Google as an underperforming stock. Why did Google miss earnings? Is growth slowing at Alphabet Inc? The false narrative feeds on itself, driving fear and uncertainty. But only in the short term.
Over the long term, all myths give way to facts. Valuable companies can shake a bad narrative given the right amount of time. These companies are “Myth-Buster Stocks.”
Google is definitely one of the “Myth-Buster Stocks.” It is a $500-billion whale that still pulls in exceptional growth. It’s breaking new ground in driverless car technology and it employs the smartest people in the world.
All those things will be true beyond this announcement and the next. Rather than trading for short-term gains, you can save yourself a lot of money and pain by extending your investment horizon.