Wouldn't you have loved to buy Action Alerts PLUS portfolio name Google (GOOGL) at 17x earnings? Wouldn't that have been an extraordinary time to buy?
You could have done it not all that long ago; in fact, you could have done it the first week of July of last year, when the stock stood at $541.
Yet, at the time you thought you were paying an outrageous amount for it. You thought it was beyond expensive, just another one of the overpriced FANGs, the stock that I had lumped together to show the love growth managers had for Facebook (FB), Growth Seeker portfolio holding Amazon.com (AMZN), Netflix (NFLX) and Google, which has since become Amazon.
Such is the life of a really tremendous growth stock that turns out to be incredibly cheap because the estimates were way too low and the business was accelerating when you were worried that it was tailing off.
Last night's call on Alphabet gave every growth stock manager goose bumps. That's because it had accelerated revenue growth, or ARG, as I like to call it, at the same time that it had ratcheted back expenses.
That enabled it to blow the estimates away and reveal a stock that turned out to be cheap last summer, when it looked hideously expensive.
I don't want this point lost on you. The really great growth stocks always look ridiculously expensive before we see the earnings in the out years.
More important, you are scorned if you champion these stocks, because you are supposed to be bound by the "rules" of not recommending pie-in-the-sky expensive stocks -- as if somehow Alphabet is going to turn out to be 3D Systems (DDD) at $97 two years ago (it is now at $7) or GoPro (GPRO) at $93 in October 2014.
As someone who has professed love for growth stocks when the growth seems sustainable to me, I have accepted the notion of that ridicule. I have even tried to explain that not all FANGs are alike.
Amazon's a total game of sales expectations, because the company can pretty much report whatever it wants to. It's a "traditionalist", so to speak.
Netflix is a sign-ups business, so you need to look at it in totality -- "let's see, those sign-ups are worth x and they stay with the company forever, so the more they have the more it is worth."
However, Facebook is a high quality earnings story, where the barriers to entry are incredibly high and the revenue streams are falling into place. It's expensive, but only if you choose not to credit a company for its growth rate vs. its price to earnings multiple.
All PE multiples in a vacuum, as opposed to coordinated with the growth rate, seem insanely expensive once they get into the 30s. Not so Facebook, which I think we will look back and recognize exactly how cheap it once was.
Then there's Alphabet. It was, in retrospect, just dirt cheap. You just didn't know until the steady was separated from "the other bets," as they brilliantly called in on the call.
Google's business is now firing on all cylinders, including cylinders you didn't know it had!
And even up $50 it's just too cheap, not on the out years, but on the now years.
