The “Little Brother” of the Internet Whips Its Siblings
The Trader’s U E-Letter: # 159
Thursday, November 3, 2005
The “Little Brother” of the Internet Whips Its Siblings
by D.R. Barton, Jr., Chairman, Trader’s U
There is certainly no shortage of cultural baggage heaped upon little brothers.
My little brother was born eight and a half years after me. Having such an age difference turned out to be a blessing – though it didn’t seem so at the time.
My mom is a very smart woman. She knew how much an eight-year-old could help with a newborn. I learned how to properly hold and carry young Douglas. How to feed him his bottle. How to bathe him. And yes, even how to change his diapers. Good life-lessons all around.
Then, after what seemed not too long a time, a funny thing happened.
I came back home one day and my little brother wasn’t so little any more. In fact, Douglas had to look down to see my “mere” six-foot frame.
That must be how eBay, Amazon, and Yahoo! all feel when Google comes over for a visit. “Little Brother” is all grown up…
The Recent Internet Recovery
First, let’s evaluate the performance of the Internet sector as a whole this year. There is both bad and good news. Take a look at the percentage change chart below…
This graph shows the percentage change for both the Internet sector (shown in red) and the S&P 500 (shown in blue).
The bad news for the Internet sector is that it is down for the year. The good news is that after a horrible first quarter, it has recovered quite nicely and is up strongly since April.
Especially Google…
“Little Brother’s” Growth Spurt
Let’s examine some data for Amazon (Nasdaq: AMZN), eBay (Nasdaq: EBAY), Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO), and a relative performance chart that compares them.
Anyone who has been following stocks in general for the past year probably had a pretty good guess how this would turn out. But the graphical results are striking: With Google up almost 100% through the first 10 months of the year, none of our other major Internet stocks are above the breakeven point.
And here are their market capitalizations, rounded to the nearest billion:
- Amazon $17
- Yahoo! $53
- eBay $56
- Google $111
Despite being a public company for less than 15 months, Google is now twice as big as any of the other Internet stocks (and has a market cap that is almost seven times that of Amazon!).
One other fundamental metric that I like to look at is cash flow from operations. Once again, Google is growing faster and bigger than its older siblings…
Cash Flow from Operations (all numbers are in millions of dollars):
Where will Google’s share price be, say, in six months? It’s difficult to say how long a stock that is under extreme momentum will continue to run higher. And this stock has been under extreme momentum since its IPO last year. It has a price-to-earnings ratio of 84, and it looks overextended on most of the technical indicators. Yet, it keeps going up.
If you must own Google, and I’m not making a recommendation either way, you can basically take one of two strategies, which are the same as for any extreme momentum stock:
- Wait for a pullback to get a better entry price. This strategy will give you a better price, but for a momentum stock, it may keep you out of it altogether. If you don’t have some patience and can wait for a correction, then this is the strategy for you. If your biggest fear is that you will be left out of whatever move Google has left, then…
- Hold your nose and buy some now. If you love the company – the fundamentals, the outlook, etc. – so much that you can see nothing but upside, then jump in.
With either of these entry strategies, you have to remember to establish a well-defined (precise) stop loss point and size your position accordingly. Also, remember that a $380 stock requires a lot of cash to buy in any significant size. So, guard against putting too many of your eggs in this one basket.
Google has certainly been on a tear. It has outperformed its fellow Internet stocks, and its growth in cash flow and earnings is impressive. If you invest in this stock or trade it, be sure that you have the stomach for some volatile moves.
Today’s TU Tips & Tricks
Advanced Trader’s U: In “The Chart of the Week,” we’ll look at the Retail HOLDRS. This relatively new investment vehicle – the HOLDRS (also called “holders” for obvious reasons), are gaining in popularity. And for good reason. These stocks allow people to invest in sectors, thus mitigating “single stock risk” (the risk that one stock can have a big move against you based on bad corporate news, etc.). They also have the advantage of allowing traders and investors to sell them short without waiting for an uptick. HOLDRS are traded on the American Stock Exchange. Here’s AMEX’s description of this up and coming investment vehicle: “HOLDRS (HOLding Company Depositary ReceiptS) are securities that represent an investor’s ownership in the common stock or American Depositary Receipts of specified companies in a particular industry, sector, or group. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid, and efficient.” For more information, go to www.amex.com.
The Chart of the Week (Pat-on-the-Back Edition)
Last week, I posted a chart of QCOM with a resistance line drawn above a double top, and asked a simple question, “Would it be a breakout or failed test?” The only clue I posted was the little arrow at the bottom right that showed the divergence in the MACD (that we have been studying is several past articles) as QCOM tested this multi-year high. In a word – WOW! The next day had strong follow-through to the downside, and the stock dropped more than 12% in a few days.
Great trading,
D.R.
Related Articles:
- Internet Stocks: Still Partying (and Spending) Like It’s 1999?
