Years From Now, Youll Remember This Stock as the One That Made You Rich

38 Jul 26th, 2013 | By Michael A. Robinson

Ill never forget the day I scored my first interview with the CEO of General Motors Co. (NYSE: GM).

This was in May of 1980, and I was brand new to Detroit. Id been a reporter for all of 15 months in fact I was by far the youngest journalist on the cutthroat automotive news beat.

And Id landed a sit-down with the leader of one of the most powerful companies on earth.

I was seriously stoked until I looked in my closet, and took an honest look at the single suit that I owned.

It was a bargain-basement suit. It wasnt classy. It wasnt something I could build a wardrobe around. And it wasnt something Id be taken seriously wearing.

I didnt hesitate: I went right to the citys best haberdasher, and bought an Oleg Cassini suit one I knew would fit in well with GMs button-down culture.

It cost me my entire paycheck, so the outlay was a bit painful. But the payoff was both immediate and long lasting.

I was welcomed into that interview feeling like a million bucks. I left with a Page One story and a newfound confidence that has accompanied me for the rest of my career.

The best investments in life are often like that: They may seem pricey or even painful when you make them. But they are actually foundational in nature providing the kind of hefty and lasting payoff that youd never get from a bargain-basement counterpart.

And today Im going to show you a stock that can do for you what that Oleg Cassini suit did for me.

Decades from now, when youre rich and look back youll remember that this was the stock purchase that started you down that path to incredible wealth

The Theory of (Stock Market) Relativity

Ive shared this story with you for a specific reason.

So many times during my career as an investment analyst, author and journalist, Ive had folks tell me about decisions that seemed small and insignificant when they made them but that ended up having a major impact on their lives, careers or finances.

And the difference between success and failure was often quite miniscule. Many times, the decision to save a few meaningless dollars to go the bargain route transformed what could have been a grand and massively profitable success into an emotional and regrettable failure.

I dont want that to happen to you.

In fact, I want to introduce you to a stock that Im betting youve dismissed out of hand and probably for one reason.

It has a very high stock price.

Before I do that, however, theres a lesson that I want to share with you one that I want you to remember.

A colleague of mine jokingly refers to it as the theory of stock market relativity.

The lesson: Just because a stock is high-priced doesnt mean its expensive.

Thats because prices are relative to valuations.

Lets say you have two stocks. One trades at $10 a share, and the other at $500 a share.

Most investors would say the first stock is cheap, while the second one is expensive.

But a closer look might tell us the opposite is true.

For instance, we might find that, despite its low price, the $10 stock isnt cheap. The reason: Its trading at 50 times earnings, while the underlying company is growing profits at an average annual rate of 4%.

In fact, this stock may have more downside risk than upside potential because it appears to be overvalued.

And if we scrutinize the $500 stock, we might discover that its actually cheap trading at 20 times earnings even though the underlying firm is enjoying profit growth of 40% a year.

Having introduced you to this way of thinking, I want to introduce you to a stock that believe almost every tech investor ought to consider putting into his or her portfolio as a foundation for long-term profits.

At first blush, this stock will appear to be priced into the stratosphere.

But like that Oleg Cassini suit that seemed so expensive when I bought it, this stock will prove to be a bargain that richly rewards your shrewd decision-making for years and years to come.

The underlying company is a high-tech heavyweight that it is eating its rivals alive.

It is setting the agenda and pushing the boundaries in virtually all of the most-important growth areas of the tech sector today, including the Web, the Mobile Revolution, and Ultra-Broadband.

In fact, if you think back to the halcyon days of Microsoft, Intel and Cisco and remember how those firms dominated the tech landscape for more than a decade youll have some idea of what this companys future is going to look like.

Except that each of those firms only dominated a single sector and this firm has a stranglehold on several and is going for more.

In fact, this companys influence is so broad and growing that Ive often counseled my readers not to think of it as a single company but more like an ETF that holds a number of high-tech players.

Of course, Im talking about Google Corp. (NasdaqGS: GOOG), a cash-rich company with extremely high profit margins that just keeps going for more. In fact, despite its market cap of nearly $300 billion, it has grown sales an average 30% over the last three years.

The best way to explain why Google is such a good long-term play is to start with the success its had in the mobile arena one of the high-growth areas of tech that weve been talking about here for months.

Making (Mobile) Waves

When Apple Inc. (NasdaqGS: AAPL) CEO Steve Jobs introduced the iPhone back in 2007, he turned the world on its ear.

And he left growing rival Google in the dust.

It would take Google nearly 18 months to even release its Android smartphone operating system.

In spite of Apples huge lead -and the iPhones status as a cult consumer device Google was determined to come out on top.

And thats just what it did

A recent study by the market research firm Kantar pegs Apples smartphone market share at about 42%.

And despite having come out of the gate late, and having to make up for lost ground, Android now commands 52% of the market.

In its July 18 earnings report, Google said it has activated 900 million total Android devices with 1.5 million being turned on each day. I find that stunning in fact, I view it as one of the single-most amazing stats in the high-tech universe.

Now, Google is gearing up to take the lead in tablets. If you had asked me two years ago how the tablet battle would come out I would have said without hesitation that Apple wins it walking away.

Not so today

Google recently grabbed the lead of that market, too, according to market-researcher IDC.

During the first quarter of this year, Android tablets took 56% of the market. Thats up sharply up from 41% from the year-earlier period. Apple saw its share drop from 57% to 39% on the same year-over-year basis.

Google flat out played it smart. It forged a very shrewd alliance with Samsung Electronics Co. Ltd. (005930.KS), the Apple arch-rival that gets rave reviews for its smartphones and Nexus tablets.

This turned out to be a pivotal relationship. It gave Google solid entries for mobile products that are outselling PCs by a factor of nearly 5-to1. And when Samsungs $400 million marketing blitz last year has gave the Korean giant the top spot in the North American smartphone market, it presented Google with bragging rights and the leverage to get more growth.

Flush with this success, Google now plans to shake up the markets for both home entertainment and broadband Web access.

The Silicon Valley giant is rolling out the next generation of ultra-high-speed Internet. Known as Google Fiber. the technology relies on fiber-optic cables and advanced optical networking gear.

Google wants to become more than a high-speed Internet service provider (ISP). The firm is pushing its ability to deliver high-definition TV (HDTV) as part of its Web bundle.

Hollywood and TV firms are moving to whats known as ultra-high-def (UHDTV), which has four times the resolution of todays HDTV sets.

That much video and audio detail eats up a lot of bandwidth. Googles response: fiber technology that delivers blazing speeds of 1 gigabit per second. Thats roughly 100 times faster than whats available in the market today.

As I see it, Google plans to be the one-stop-shop Internet company. It will provide high-speed access and use that to help push its search-engine (and ad sales) capabilities.

This is one of the reasons I believe Google is a good long-term profit play. The fiber platform started in Kansas City and now has limited distribution. But Google is thinking years ahead as it establishes a foundation that will allow it to dominate this market.

Meantime, its working hard to unseat the undisputed leader in the hot trend of cloud computing, which is a term for hosted data services.

The Web-services division of Amazon.com Inc. (NasdaqGS: AMZN) dominates a sector known as Infrastructure as a Service (IaaS). The Internet retailer commands 36% of the IaaS market, which is right now the fastest-growing segment of cloud computing.

But Google is coming on strong. Independent online data firm Cloud Spectator says in recent benchmark tests Googles servers ran faster than those from Amazon.

Ironically, as of right now, Google is barely a blip on Amazons cloud radar.

But if I were running Amazon, Id be worried. Just look at what Google did to the iPhone and the iPad.

So lets get down to the topic that most folks probably focus on Googles stock price, and its valuation.

The Next Google

Trading at roughly $903 a share, GOOG has what appears to be a very high sticker price.

But it offers a lot value for the money.

In this years second quarter, for instance, it grew earnings by 16% the second straight quarter it grew that fast.

It generates nearly $11 billion in free cash flow (FCF) a year. It has a profit margin of nearly 21% and has grown earnings at an average annual rate of 17% over the last three years.

If we do some rough financial modeling (this is what the analysts up on Wall Street do but they usually for their best clients before they do it for you), we can see that this stock is nowhere near as expensive as most individual investors fear.

At that growth rate Ive just demonstrated, Google should earn roughly $55.00 a share by the end of 2015. If the stock still trades at roughly 26 times earnings, that would mean a price of $1,430 a share, an increase of about 58% from the current price.

In short, if youre looking to find the next Google just look at Google itself. The company is a monster, its in all the right businesses, and it has a well-demonstrated ability to execute.

Of course, Im not saying you should put your live savings into Google.

But like my Oleg Cassini suit, this stock will act as a solid foundation that you can build upon and that will allow you to move forward with the confidence that you will succeed at every stop along the way.

Confidence builds wealth. And wealth builds confidence.

If weve helped you do that, then Ill consider my work here as my latest successful stop.

Have a great weekend.

38 Responses to Years From Now, Youll Remember This Stock as the One That Made You Rich

Good for Google but when the US economy falters and goes into bankruptcy, even the best stocks will crash. That will be a strategic technical event.

WHO IS NEXT AFTER GOOGLE ?

You tout Google Fiber Verizon has already abandoned further expansion of FIOS. Current and advancing compression technologies are leveling the playing field against further deployment. I dont see Google knowing more than Verizon regarding fiber optic networking and personal interconnects.

IBM president in the mid 1970s said that PCs wouldnt catch on. Many other examples too.

Just because an established company says something doesnt make it law.

All good points. Google definitely has much going for it, albeit in a rapidly changing field, I would not best against Google. Thanks!

Ref. GooG the reasoning seems quite sound and I would like to have four shares of this stock to leave to my grandchildren, only problem being cost. I am a 95 year old, 100% disabled combat veteran of world war two, struggling to get by on my disability pension. Any suggestions would be welcome.

I was thinking the same thing.Its all well and good that this stock will be exploding but how do you get in when you are on a very low fixed income. Ideas are welcome!

Hi Earl,

Thanks for writing to me. And thanks for your service to our country. My dad is a combat veteran, having fought in Korea and in Vietnam. Now then, as for investments. I would suggest you keep reading this column. Ill be sharing lots of investing ideas with you. And there will be several stocks cited with lower prices than Google. One of them is bound to fit your situation.

Cheers and best wishes,

Michael

I love it.

Thank you for great advise.

It never ceases to amaze me how you continue to offer stock pics that have soo much potential. You, at least for now are really coming through. Part of my disenchantment is that I dont want to money grub over peoples health. I see the importance of new drug discoveries, but there is nothing altruistic about todays pharma investing. Its all about the money. Then, there is the oil guy. All along, we have destroyed multiple water tables across the country while being told that it is for the sake of our own energy independence. Instead, weve turned around and sold both our gas and our oil to the highest bidder overseas. This makes greater profits for the oil and gas companies but drives up the prices here. What a great, short sighted unpatriotic and horrible cost we have leveraged upon the unsuspecting American people. I believed the lies as did the rest of the sheep. (You see, Michael, we want heroes. We want people and corporations to stand for something greater than avarice and selfishness! we are thirsting for people and companies who walk in real character!) So, Im done with oil and gas. But technology has my ear because it seems to be pure free enterprise. Keep up the good work and I would love to hear from you.

Lawrence & Linda Sima

Kudos Mr. Robinson,

What a well written and researched article. You touched on many fundamentals that are the keystone to success in any endeavor. Your heartfelt self analagous story touches many a nerve center with regards to well spent money.

Keep up the great work!

Best Regards,

C. Tate

I agree with some of your comments re: Google, but I think you need to rethink some of them. You say Android has beaten Apple, but that has not necessarily happened. Google makes no money on Android directly. Samsung is no friend of Google. I just read an article entitled Googles next biggest competitor will not be Apple but Samsung. Samsung is rapidly trying to separate itself from Google as fast as it can by so modifying Android as to be unrecognizable, much as Amazon has done with Kindle.

What Google DOES make money on Android is ad revenue and yet Apple has clearly won that battle. Figures show most ad revenue is generated by IOS devices.

Tablets and smartphones are other examples. iPads are the de facto standard in enterprise, medical, etc. Android or Windows RT has not made a dent in those primary markets. iPhone holds a similar position. This is much the same position that Apple was in with Microsoft for a long time.

In some of the other areas you mentioned, Google has some real possibilities, but often it is also seen that if you spread yourself in too many areas that arent really related, you lose your focus and lose the momentum you once had.

that is good advice, yes high price shares but good things ain,t cheap

Dear sir/madam

please furnish me in detail how we can buy the shares of google

b regards

MOHAMMED ASGHAR ALI

ABU DHABI UAE

we need another big winner

Apple by itself is 48 percent of the market, Google plus all other Andriod based phones combined make the other 52 percent.

I told everyone I know to buy Google the day it came public, but as it sits today I like Apple better even with some shrinkage.

VERY GOOD report. Thanks much!

And a great weekend to you too

Thanks for trying to help with sound advice. If one has to borrow at 20% interest rates to pick up a few shares, would it still be worth doing?

Hi Don,

Thanks for contacting me. In short, no, do not borrow to buy stock, certainly not at such high interest rates. You have to make 20% plus a little extra for the brokers commissions just to break even. To me, that doesnt sound like a solid financial plan. Too many things can go wrong. Stocks rarely make a straight line forward. What if Google reverses for a while and you are upside down plus paying interest on the borrowed funds? I wouldnt advise going that route. Hope that helps.

Michael

as ever ,your writings fab,excellence is standard.kind regards,redders.

GREAT INSIGHTS. FROM MY SINGAPORE PERSPECTIVE I HAD IDENTIFIED APPLE AS A GREAT PLAY. BUT I MISSED IT BECAUSE I WAS DOWN WITH DIABETES. I RESONATE WITH THE ARGUMENTS PRESENTED.

you paint a beautiful rationale for google

but cant what has begun happening to apple, down approx. 1/3 from high,

happen to google stock too

and as you say/imply, intel, cisco, and Microsoft have relatively collapsed compared to where they had been

this is a not unusual reality, we all know the fear of an oversold brilliant technology and in the other industriesfallen angels and other cusswords

general motors and general electric, bank of America, Citibank, there has got

to be thousands that been to semi hell and semi-back

stansberry himself predicts general electric as bankrupt, though I am way too ignorant of accounting to fully understand how this Amazonian collapses, but

it did get down to five bucks, so porter of could make a basket from

half court, just like me or ye predicting a 251 longshot

frankly je ne sais pas, of course I do not know, Michael, but here is a point that

is bothersome

if google is not vulnerable as any other mortal corporation/person is, then

why care what the hoy-polloy, bleachers/commoners/schmucks do

this damn investing if not speculating stuff is zero sum, meaning cut-throat, at least to an extensive large

TALK IS CHEAP

Get me google please.

Like your thinking. I invested in Google after it had doubled from IPO price when my broker laughed at the idea. Happy for that investment. I see all the

positives that you mention, Google has out smarted Apple. But it still makes

money from advertisement clicks. It has given away Android platform for free,

Samsung making all the profit and overtaking Apple. Motorola acquisition for

$12 B is yet to come up with a smart phone, Nexus 7 yet to make inroads. Google is valued like a growth stock while Apple is valued like a value stock.

CEO Cook has been saying game changing products will be forth coming for

over a year. Should investors be getting out of Apple shares? Or is Apple going to be an innovator again?

Hi K,

Thanks for taking the time to write to me. I appreciate your support. Your comments on Apple cut to the heart of whats going on with the company. As CEO, Cook keeps saying he has lots in store for us but so far hes not showing us what hes got. Apple trades at 11 times earnings. Without any new innovations Apple is priced for value but if the PE just met the market average of roughly 15 times earnings theres still some upside left. Clearly, investors are concerned about the erosion in market shares for its mobile products.

As for the stock, Id like to see it trading in a fairly narrow range for a bit to make sure we have all the short hitters washed. That would show solid support and set up the next leg up. Hope that helps,

Michael

I READ ABOUT GOOGLE FEW WEEKS AGO AND LEARNT, ITS THE CLOUD STOCK TOO.

I AM SOLD ON IT. I WILL BUY GOOGLE STOCK.

I HAVE BEEN INVESTING, SINCE 1996.ALL BY SELF.

I MADE GOOD MONEY WORTH$76,000. IN ONE MONTH TRADING A SILVER STOCK, IN 2009.

I REGRET NEVER LEARNING THE OPTIONS. AND SO I FEEL I AM A LOOSER.AT ALMOST 73 YRS AGE, I DONT WANT TO LEARN OPTIONS. BUT I WILL HAVE TO.

THANK YOU,

I HOPE TO BENEFIT WITH YOUR HELP AND YOU BENEFIT FROM MY FEES.

Hi Urmila,

Thanks for posting a comment. Much appreciated. Congrats on all your investing success. I would like to caution you, however, to be careful with options. They can be extremely volatile. Good luck with all your investing

Cheers,

Michael

Not sure what your reasoning here is. Have you been out in real America today? Apparently not! No one has that kind of money anymore, $903 a share is a joke.

Dear Greg:

Thanks for taking the time to comment … which, I always welcome.

Let me say that if your concern about price is because you have a small amount to invest, I understand where youre coming from completely. If you are starting with $1,800. then it can seem overwhelming to buy just two shares of a stock.

However, if youre concern is simply that no one has enough money to invest in quality stocks, I have to question your analysis. In fact, I believe there may be a misunderstanding between us.

Heres the thing. You seem concerned more about the sticker price than the potential return. In other words, as I see it, the focus shouldnt be on price but on the profit you can earn – the bottom line return on investment.

And a 30% return (just to pick a number for an example … as we noted in this column, we think, over time, an even higher profit is possible) is a 30% return – no matter what the stock price happens to be.

In short, a 30% return on a $900 a share stock is no different than a 30% return on a $20 stock.

Look at it this way.

Example A (Low Priced Stock): You invest $1,800 in a $20-a-share stock, and end up with 90 shares.

A 30% return on that outlay is $540 (30% of $1,800 is $540). Each share is now worth $26 each, meaning your total holdings are worth $2,340 – or 30% more than you started with.

Example A (Google-Priced Stock): You invest $1,800 in a $900 stock and end up with 2 shares.

A 30% return on that outlay is still $540. It means the shares go up $270 each, taking you to $1,170 a share (as we said, certainly possible, given what we explained about Google). You’re holdings are now worth $2,340, which is 30% more than you started with.

In each of these cases, you end up with the same amount of money. It’s not the investment per se but the return on that investment that really matters.

And in this era of discount, electronic brokerages, where flat fees are used, odd lots are no longer the limiting factor that they used to be. You pay more or less the same amount…..

Our goal here is to find ways to make you money, to find profit opportunities. And we go wherever we have to in order to find those opportunities. Sometimes that will be a $10 stock, sometimes a $90 one and very rarely a $900 stock. If we start creating artificial boundaries or exclusions, we might miss some of the best moves … like Google.

Michael Robinson

Is there any possibility for a stock split. Maybe 20 to1. This will allow the hard working lower and middle class consumer ( who are the majority user of GOOGLE site) to invest into buying GOOGLE stock. Maybe a stock split 10 to 1 will be most attractive and fair !

Thank you. Shayam

Hi Shayam,

You bring up a good point. When stocks run up to high sticker prices, some companies will split the shares to bring the price down. However, right now I know of no plans Google has to split the stock.

Cheers,

Michael

No doubt Google stock will go even as much as 3k to 4k a share especially with their cloud technology which is tomorrows trend which is also one of the technology that may render Gates PC obsolete.

However the $903. a share is a huge to risk and base on this amount, this could be Warrens place of investment not for the middle class down. Personally, if i have $100K to invest is this the right place

These fundamentals are great, and yes, perhaps Google could go to $1300 or $1400. The problem is, when it, like all other stocks get caught up in a potentially brutal market correction ( profit taking and sell off along with massive margin debt ), it will not get close to those potential values. When this sell off occurs, even very fundamentally sound companies will take some beating in stock price and Google may fall to $650.

Hi Mike, you are doing a great job. The issue is not the price of the stock but the percentage return. Also the buyers objective; long term or short term holding period. Google is a stock for the ages your retirement or your children or grand children. You can accumulate it one share at a time. Some brokers will sell one share. I started with 25 at $325.00; 30 at $412.00 ; 5 shares at 399.00 ; and up to $603.00 to 100 plus shares.

If you believe that the stock has long term potential then you go for it. Like Apple ,now is the time to buy because it will be up by Christmas