There are, as most investors are aware, two basic types of analysis for stocks, fundamental and technical. Fundamental analysis looks at the basics of the company; sales, margins, profits, growth prospects, dividends etc. Technical analysis looks at the price history, using past movements to predict those in the future. Both involve some prediction of events to come, also known as guesswork, so neither is fool proof.
Technical analysis is generally considered to be more useful in predicting short term moves, and therefore is for trader types, while fundamental analysis is longer term and therefore should be employed by investors. Of course, an ideal opportunity comes when both technical and fundamental analysis point to the same conclusion. Following a tough month for its previously bulletproof stock, that may well be the situation right now with Google (GOOG).
A month ago, GOOG set the tone for a run of disappointing tech sector results, reporting non-GAAP Earnings per Share (EPS) of $9.56 versus a consensus expectation of $10.80, on revenues of $14.1 Billion, slightly lower than expected. Disappointing, sure, but not disastrous. More worrying was that the much watched “cost per click” fell by around 6%. This measure of what Google is paid by advertisers was expected to drop, but by less. There is no doubt that Google’s dominance of the search market will lessen somewhat, but the company is no longer a one-trick pony after the success of Android and various acquisitions.
The problem with reading too much negativity into these results, however, is that they are bad only when compared to exaggerated street expectations. When you step back, the fact is that GOOG realized $14.1 Billion in revenue. Those of you who remember the chatter at the time of the company’s IPO will remember that the number 1 question was “How will they get decent revenue from free to the consumer search?” It would seem that they have answered that one.
The tech sector may be struggling somewhat, but GOOG have shown themselves to be innovators of the first degree, and, in many ways more importantly, very good at monetizing their innovations. That isn’t going to change. Their policy of not paying a dividend to date has left them with an enormous stockpile of cash; not a bad position in a rising rate environment, and just the cash could contribute to next Quarter’s earnings.
The technical case is pretty clear, too.
After a rough month, the stock is approaching a previously significant support level around $850. I should explain that I, with a trading background, look at these levels more in terms of exit levels than entry levels. The reasons I believe GOOG is a buy are more to do with a belief in the management of the company and a perception of value at these levels. VectorVest, whose charts and analysis I use, assigns a value of over $974 to the stock, based on their proprietary valuation model.
What the proximity to a support level affords is the opportunity to enter the position with a controlled level of risk. If one were to buy around Friday’s close, at $857, then a stop-loss order could be set at around $830 to protect against a clean break of that level. When taken in conjunction with an initial price target at the previous highs around $928, the risk/reward equation works in your favor. You are risking a 3.15% loss to potentially make 8.28%. Obviously this is the type of short-term trade that makes sense.
Should the target of $928 be reached, you would have a few options. You could just take your profit and move on to the next trade. You could move your stop-loss up to ensure at least a small profit and then hold on to the position, or you could sell some of the shares and effectively establish a position at a great level. The latter would be my preference, as part of the initial driver for the purchase was a long term belief in GOOG.
The point is that those who favor one type of analysis over another are limiting themselves to one type of trade. It is possible, and I would say desirable, to combine both types of analysis and both types of trade; to take a position with a short term target, then morph that into a long term position should things go your way. In investing, trades with limited risk and long term potential are rare. When fundamental and technical analysis both point the same way, as I believe is the case with GOOG right now, investors should take the opportunity.