Bubble-Weary Market Watcher Eyes Google

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The New York Sun

Fads die hard on Wall Street, in effect bloodying those investors foolish enough to ignore the long-held belief that the name of the game on Wall Street is to buy low and sell high, not the other way around.


An obvious case in point is the Internet bubble of the late 1990s and early 2000, which saw many much-ballyhooed online companies wind up in the corporate graveyard and numerous Web stocks selling at more than a hundred dollars one month turn into $10 stocks a month later.


More recently, we saw another bubble replay in tiny Laser International, a maker of stun guns whose shares over the past couple of years rocketed from about a buck to roughly $200 and split along the way.


Everyone loved it except the battered short sellers (those high risk-takers who bet the stock price would fall). Eventually, though, reality set in and the stock plummeted. Over the past 52 weeks, the shares fell from a 52-week high of $154.06 to a low of $23.76 and closed Friday at $40.90. Even at its current price, Taser still sports an astronomical price/earnings multiple of 72.


Now we’ve got a new mania – Google-mania – what with the shares of the Internet’s most popular search engine streaking from their mid-August public debut at $85 to Friday’s all-time high of $199.95.The company’s price closed the session at $190.64, amid growing speculation – which the company won’t comment on – that a stock split is on the horizon.


Once again, the short sellers are getting butchered (about 25% of Google’s 27 million-share float is estimated to be short).


To one pro, Guy Cohen, president of Spellman Financial, a New York-based research boutique, the Google shorts are also graveyard bound. “It’s insane to short this stock,” he tells me. “It’s going like a freight train; for now, it has nowhere to go but up, and you’ll see it at $250 before it begins to go down.”


By the same token, Mr. Cohen said he wouldn’t buy the stock because buying a stock on momentum (that is, chasing a company’s shares because they’re rising) is a losing game. “You only get sucked in and buy more,” he added. “At some point, the numbers won’t live up to expectations and the stock will collapse. The problem is you never know when.”


Characterizing Google as an “insanely overpriced stock,” Mr. Cohen noted the company has done nothing meaningful in new product introductions that will enable it to grow and expand its gross margins. As of now, he said, Google is strictly riding the growth of online advertising.


Its bottom line currently is pretty impressive. In the third quarter, Google reported revenues of nearly $806 million, up 105% from year-earlier levels. Further, Mr. Cohen looks for sharply higher earnings – $1.16 a share this year, followed by a jump to $2.27 in 2005.


“It’s not the results I’m quarreling with, but the valuation,” notes Mr. Cohen, who points out that Google is selling at 128 times his 2004 earnings estimate and 65 times his projected 2005 earnings.


Actually, this is the second time in recent months that I’ve solicited Mr. Cohen’s market outlook on Google. The last time was in August, based on a sale recommendation he had made shortly after the IPO. Since that recommendation, hardly his finest hour, the stock has just about doubled, rising around $100 a share.


The speculation, he admits, was much greater than he expected. Updating his strategy, he has just upgraded the stock from sale to neutral. His rationale: (1) A growing number of momentum players, (2) the small float, (3) the possibility Google will be added to an index, perhaps the S&P 400, which would require funds (that weight their holdings to an index) to buy it, and (4) aggressive mutual fund buying (for example, Fidelity owned 26.6% of the float as of August 31, while Legg Mason owns 15.7%).


So what would he advise investors to do about Google? His response: “Forget you ever heard of the symbol GOOG (Google’s stock symbol), treat it like it’s a private company, and don’t chase momentum. Keep in mind, as well, that all bubbles burst and that Google is a bubble that’s bound to burst.”


The New York Sun

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