Carnage

Ouch that hurt!

My growth portfolio down 6% in one day! CSR got the day off to a bad start with a great (!) earning report which obviously did not live up to market expectations and the stock finished down 13%, wiping off all my gains on this one. And to think I was up 30% a month ago!

Then the Google CFO happened to mention something about slowing growth and it got caned, along with most of the other Internet stocks.

The only good news was in my mortgage portfolio where RBS issued a great report (increased dividends, buybacks starting) and shot up almost 3%.

BTW I must comment on a pathetic Forbes article about Google's valuation. The article is here. I can't believe that the author used Yahoo's current trailing PE of 22 to compare against Google's. How any so called internet stock analyst look at Yahoo's trailing PE and not have the words "skewed by one-time items, not useful for comparisons" scream at them is beyond me. The forward PE is over 40 for goodness sake. The whole article is just repeating what journalists have been saying for months anyway. Can't they find something new to write about? It is not that I mind hearing the bear case for Google but to talk about its PE and price-to-sales ratios without talking about its growth rate is just meaningless.

Anyway rant over.

Tomorrow has to be a better day for my stocks... doesn't it?

Never average down

This is a rule that I have read in more than one book. And I think it is a very good one.

After averaging down with Vodafone in my mortgage portfolio I now find myself in the unfortunate position of having over 30% of my portfolio tied up in this underperformer. So even though Tesco zoomed up over 3% on Friday my portfolio only gained 1% as Vodafone went down (again!)

Back in November when I bought a load more VOD at 130p I was sure it would only be a matter of weeks before it returned to 140p and I was certain of a quick 5%. However I guess you always have to be aware of the possibility that you may be wrong.

In this case I was very wrong and VOD is still bouncing around at rock bottom at 116p. To compound the agony, BAA, the company I sold to fund the VOD purchase, have recently jumped up on bid speculation. A case of wrong place at the wrong time.

Fortunately at this stage of my investing career I can afford to make a few mistakes as long as I learn the lesson.

So lessons learnt - averaging down is very dangerous, and no more rushing in as soon as the price dips.

Google Goulash

It is amazing how quickly sentiment changes. After being the Wall St darling for 12 months Google is now the number 1 bear target. All because of an earnings miss due to a high tax rate. Suddenly GOOG is only earning $8 this year and $9 next! Suddenly click fraud is going to spell the end of its business model and Yahoo! and Microsoft are going to eat it alive. According to Barons Google is going to somehow only earn $6 this year, only slightly more than 2005, and the share price is going to halve.

Google's $350 share price makes it an easy target for headline-grabbing journalists. Would it make such good headlines if they did a 10 for 1 split and the SP was $35? Would it make such good headlines if the market cap. was less than $100 billion?

What I am trying to say that is that the SP price and market cap. that the journalists keep going on about are not very important. What matters are the PE multiple and the growth rate. Analysts making the bear case talk about a trailing PE over 70. They don't talk about a 2007 PE of 30.

Click fraud has been around as long as Internet advertising. As Internet usage grows so will click fraud, as will revenues.

Yahoo! and Microsoft! have been competing with Google for years but Google has kept on gaining market share.

There has been talk of a search keyword price bubble. And the problem is? High demand leads to high prices. As long as Google remains the default search engine worldwide then the prices will stay high.

I have not sold my GOOG shares. I will not be buying more as I do not want to under-diversify my portfolio but I think GOOG has as much chance of gaining 50% in twelve months as any of my other holdings.

Internet rotated out

The above image from Yahoo! shows what has been happening to the Internet sector in the last week. After the three respective earnings releases failed to impress there has been a gradual rotation out of the Internet sector. As a holder of Google and eBay it has been a bit disconcerting but at least it is just a general adjustment and not any specific problem with either company.

My timing of the selling of Microsoft and purchasing of eBay was particularly unfortunate. I sold MSFT just before their earnings release, after which they jumped over 5%. I then bought eBay at $44 and they are now down to $40. This is just the way it goes some times and there is nothing you can do about it. I still maintain that eBay was a bargain at $44. At $40 it is an absolute steal but someone is selling a lot of eBay shares and until they stop the SP will not recover.

The forward PE for eBay is now under 40. Surely that is low enough for a company growing at 40%? The PE decay of eBay over the last 14 months or so has been painful. At Christmas 2004 the trailing PE was well over 100. Luckily I sold my holding then and bought in after the earnings release when the SP was at $42. One year later the trailing PE is down to 50 and the SP is at $40. All this time the company has been healthily growing at a 40% clip. This is the danger of buying at high multiples and I am just glad I am not one of the poor people who bought this at $57. They might have to wait another year to get their money back.

eBay is in great shape. One day the SP will be too. I will just hide behind the sofa in the meantime.

VeriGood VeriSign

There have been three earnings releases recently that affected me: eBay, VeriSign and Google. My assessment was that Google's was OK, eBay's was good and VeriSign's was excellent.

News that VRSN is being added to the S&P500 and a solid earnings release has resulted in a recent 10% SP rise, although it has fallen off in the last few days along with the rest of the Internet sector.

What really impressed me in the conference call was the way Dana Evan, the CFO, just mentioned in passing that VRSN had purchased 9% of its float in 2005. 9%!!!!. And it still ended up with more cash in the bank at the end of the year than at the start. I would have been tempted to plaster that 9% figure all over the front page of the earnings release.

VeriSign's Internet Service Group is growing at 20% at the moment. In 2007 when they are allowed to raise the prices for .com and .net renewals this figure could accelerate. The problem is the Jamba!/Jamster product line where revenues are all over the place. Once Jamba! revenue returns to steady growth you suspect that the share price will start testing the early 2005 levels of $30+.

VRSN is on a 2006 PE of 21. This is pretty reasonable in my book for a company of its qualities.

VeriSign has become one of my favourite companies. I would rank it way above Google and slightly behind eBay. Just wait until Jamba! gets going again!

Was that it?

After all the screaming about Google missing Wall Street estimates by a mile the stock finished down 7% today. And guess what - the stock is up in after hours trading! Not nice for holders but hardly comparable to eBay's crash one year ago.

I am holding on to my six shares anyway. The EPS only missed expectations because of the tax rate and Google is still one of the fastest growing large caps around.

If one more commentator talks about Google's expensive valuation I think I am going to pull my hair out! Would it attract the same comments if they did a ten-for-one split and the share price was $40? I doubt it. What amazes me is that no one talks about Yahoo's expensive valuation but its forward PE is now higher that Google's and it is growing much more slowly. It has always been a mystery to me why Yahoo trades at a premium to other internet companies like eBay.

I think $400 is a nice entry price for Google, with prospects of $600 by the end of the year. There is certainly more upside than downside at these levels.