EQUAL OPPORTUNITY BARGAIN HUNTING

A stock often lumped in the Growth bucket is Alphabet (GOOG & GOOGL), formerly known as Google
GOOG
. The titan of search and the “G” in the FANG (Facebook/Meta Platforms, Amazon
AMZN
, Netflix
NFLX
and Google/Alphabet) gang.

Alphabet boasts revenue growth characteristic of your typical growth stock and pushes the boundaries of the historically impossible through some of its high-risk, high-potential-return style ventures that it deems Other Bets. Shares also trade for a five times book value per share.

WHY VALUE?

While 2022 has been tough for the majority of stocks, it’s been a good year for less expensively priced stocks, relatively speaking. Indeed, as of 11.22.22, the Russell 3000 Value index was down only 5.4% year-to-date vs. the 25.0% plunge for its Growth counterpart, the Russell 3000 Growth Index.

Proponents of Value investing have welcomed the turning tide, which began on Halloween 2020, as the approach had been maligned in recent years. Of course, historical experience favors the style over the long term as well as in periods like the current one that has prominently featured rising interest rates & inflation, a subject covered in a recent report my team has penned.

To be sure, as highlighted in The Prudent Speculator’s special report, Don’t Forget About Value, such a stringent approach (sticking just to stocks present in either index) is imperfect and could lead investors to miss out on hidden opportunities that await across the aisle.

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Of course, as mentioned in my feature of Microsoft (MSFT), there is much more to choosing an attractively priced stock with handsome appreciation potential than a few valuation metrics. Indeed, we at The Prudent Speculator have long argued that growth is a component of the assessment of the investment merits of any company. In fact, the three-to-five-year target prices highlighted in our newsletter always incorporate forward-looking expectations for sales and earnings, not to mention brand strength, competitive position, product breadth and depth, and management prowess.

MOONSHOTS

Alphabet boasts tremendous brand value through its ownership of Google, whose name is part of the global lexicon as the worldwide leader of online search, and increasingly as a medium for premium content through YouTube.

The prominence of these assets makes them key platforms for use by millions of companies to advertise across devices and formats. Indeed, advertising represents the majority of Alphabet’s revenue and nearly all of its operating income.

But the cash flow generated from advertising allows Alphabet to remain focused on innovation and the long-term growth opportunities that new areas present. One such opportunity is through Cloud Service, where Alphabet competes with Microsoft, Amazon and others.

The company has also invested across health, life sciences, transportation sectors and others that the company calls Moonshots. These venture style bets are in the spirit of staying relevant through revolutionary technological change. And even as some of the company’s inside of Google may not meaningfully contribute to revenue, like its web browser Chrome, they have significant strategic value in its ecosystem to support data generation that underlies its advantage in advertising.

GROWTH AT A REASONABLE PRICE

At The Prudent Speculator, we analyze the fundamentals supporting about 3,000 individual stocks, both domestic and international. We synthesize financial measures we deem important predictors of favorable long-term performance into a value algorithm. We aggregate individual metrics into a composite stock scoring system that ranks individual stock valuations in the context of valuations among peers and the broader universe. Alphabet ranks highly in our scores.

After reporting record-setting earnings per share in 2021, building uncertainty for the economy has weighed on ad spending in the near term, shrinking top-line year-over-year growth each quarter over the past year.

The market has soured in turn, driving the stock down by a third from its peak over the past 12 months to trade for 20 times the $4.88 of EPS expected by analysts this year. This reaction is short sighted in my view and doesn’t appropriately reflect Alphabet’s terrific balance sheet, market-leading search engine and double-digit earnings growth anticipated for the years ahead.

In fact, the current consensus EPS estimates for 2023, 2024 and 2025, stand at $5.87, $6.94 and $7.78, respectively. Obviously, there is no assurance that the bottom line will rapidly grow, but just to maintain the current P/E ratio would require a significant increase in the “P!”

MEMBER OF BOTH RUSSELL INDEXES

No doubt, Value purists will argue that Google’s metrics are too rich to justify a buy today, but they were saying the same thing when we first recommended the stock in The Prudent Speculator in April 2018. Believe it or not, GOOG was then trading for $50 and the P/E ratio was about the same as it is today! I also note that Alphabet is returning a significant amount of cash to shareholders via a gigantic ($43.5 billion remaining) repurchase program.

So, is Alphabet a Value or a Growth Stock? I think the answer is Yes, especially as GOOG and GOOGL are members of both the Russell 3000 Value and Russell 3000 Growth indexes!

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