Heed Google's Pullback Lesson

 | Feb 19, 2013 | 10:56 AM EST  | Comments
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You always hear people say "I will buy that one on a pullback."

I know, I say it too. No one wants to pay up, or chase a stock, because the results for the last 12 years have been mixed at best if you adopt that strategy, even with this terrific market.

But one thing's for certain, when you get the pullback people are way too gun-shy  to use it. Take today. We all noted that Google (GOOG) hit $800, its all-time high.  So many wish they were in Google. It's a score of a lifetime if you had it.

Yet, when this terrific online search-and-destroy-the-competition juggernaut fell 60 points back in October of last year after it reported a miss and gave uncertain guidance, did you use that pullback to buy? Or did that $754 plummeting to $695 scare the heck out of you? Did you use the further pullback to $645, another 50 points lower, to put money to work in Google? Was that the opportunity? Or was that pullback just another one that you had to avoid, even as you might have been waiting for one after the initial drop?

I think the answer is that it was a pullback wasted on many because it seemed like Google's growth was over. There were moving parts that worried people, the cost of acquisition, the gross margins, the continuing spend on uncertain products.

Yet, all you really had, in retrospect, was the pullback you needed to pull the trigger, the one you might have been patiently waiting for until it happened. Making matters worse, at least for many of you, the second pullback created what could be the beginning of a nasty head-and-shoulders pattern, giving you pause that the stock could sink still further as the technicals signaled a mountainous top if they didn't hold.

Of course it turns out that the stock did stop going down, the ship righted itself, the company developed a host of new products, including the much-beloved Chrome low-priced computer and a continuation of its excellent Android operating system, still without real monetization, but that's just around the corner when they want it to be. Not only that, but now Google's become the new Apple (AAPL), with talk of retail stores and a sense of excitement that includes a use of its cash hoard to extend dominance to other areas, including handsets. What's amazing is that while a hedge fund dukes it out with Apple about capital allocation, Google's getting growth via its cash hoard and that's all anyone really wants from a technology stock, as we know from the stagnant stock action that comes from stagnant growth at Microsoft (MSFT) and Intel (INTC), despite those two offering attractive dividends like the one that Apple dissident David Einhorn has to applaud.

Now here's the real kicker. When Google broke down we didn't see wholesale number cuts. We just saw a shrinking of the price-to-earnings multiple to a level that actually was, at one moment, below the average stock in the S&P 500, at least on future earnings. You got the highest-quality growth stock for one of the lowest multiples in the book, well under companies like General Mills (GIS) or Johnson & Johnson (JNJ) that have dramatically subpar growth vs. the Internet giant but traded at much higher multiples than Google did at the bottom or, in the case of General Mills, even at the top.

The lesson? When you get the long-awaited pullback without a concomitant major slashing of earnings, perhaps you really should take advantage of it. Don't fear what you've been waiting for, as Google's run to $800 shows, and instead, embrace it. That's how the biggest money is ultimately made.

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