Alphabet Stock Primed for Another Good Year in 2020
Alphabet, better known as the company who owns Google, has been a star performer ever since the stock got issued in 2004. As big as it has become, it is still growing nicely.
Barron’s doubled down on its selection of Alphabet as one of their top 10 stock picks for 2020 by running another article on it on Monday, in addition to its appearing in their main article on their top 10 recently. This unusual move seems to reiterate how much they like this particular pick, and given that most of their top picks are stocks that they consider to be “value” plays, Alphabet really does stand out among this particular crowd and does deserve the encore they just gave it.
Their top 10 for 2019 didn’t exactly set the stock market on fire, even though there is a hint of boasting as they claim that from the point last December, their picks have been able to keep pace with the S&P 500, with both being up 24%. While it’s certainly good not to underperform, this places them on the same level as a young child with no knowledge of stocks picking these 10 out of a hat, or an index investor who just chooses all of the stocks in the S&P 500, meaning that they have to do better to add any value to this conversation, although they are up to bat again this year and we’ll have to see how they do.
Keeping pace with the S&P 500 doesn’t mean that you beat all of the index heads, as the ones that have invested in the Nasdaq have beaten you handily, as they will in good years as well as over longer periods, and 2019 has been one of the best years for stocks ever as we get ready to close it out. A year ago, we hit the bottom, and while there are always ups and downs with stocks, we have never looked back and just hit another all-time high on Monday.
We don’t use the Nasdaq as a reference point very much though, because those who are trying to beat indexes prefer the bar to be lower not higher, and fund managers already find beating the lesser performing index challenging enough, with most failing. If you can say that you were better off just holding the better of these two indexes, that does in itself serve to defeat a fund or any strategy that just does not measure up.
This year’s list from Barron’s does include some unusual picks, including Royal Dutch Shell, which we roasted in a recent article. This was one of their value picks, along with the likes of Berkshire Hathaway and others, and given that value picks are by nature underperformers, they are more likely than not to continue this and bring down their numbers, but Alphabet is a different animal altogether.
Alphabet stock first hit the market back in 2004, at a price of $50 per share. These days, it trades around $1350, which means that it has grown 27 times, or 2700%, over the last 15 years. That’s an average return of 180% per year over this time, and investors, who have stuck with this one, have been very amply rewarded.
We always want to resist the temptation of thinking that a stock has grown so much that it’s level of growth makes it less attractive, or even something that we want to steer well clear of. If people are looking to hit a long home run that Google and other high performers have delivered, with triple digit returns over time like this, you do have to get in on a much lower floor than Alphabet is on now, on one of the upper floors of a building that is still expanding upward. However, given that it has continued to be a star in the market year after year, with little reason to think that this won’t continue, this sort of play is among the best we can make due to their combination of potential and reliability.
Alphabet’s performance in 2019, like Barron’s top 10 picks for 2019, has been little to write home about, although they at least beat Barron’s and the S&P 500 by a bit with their 31% year-to-date growth, although that does leave them a little short compared to the Nasdaq. This might have us thinking that this is a stock whose growth has levelled off so much as to have them a bit of a laggard, and we generally recommend against betting on laggards unless the conditions are really right for this sort of play, but when a stock has been as reliable as Alphabet, that needs to be factored into the decision as well.
More Recent Performance Matters Even More
What we really like about Alphabet here is how they have performed in the second half of 2019, and all of the yearly gains from the stock has come since June 3. You don’t just want to look at a stock’s yearly returns, as how it is trending matters even more, and Alphabet has been trending very well indeed over the last 6 months and is primed to continue this into next year.
There’s enough evidence from this alone to want us to at least hold it into 2020 until it reaches a point where it tells us that it is getting too tired and our money would be better place elsewhere, even though Barron’s chooses its dates for an entire year with their approach, with their readers often looking to get married to their plays, for richer or poorer.
The road may be clear for as far ahead as the eye can see, and we might be tempted just to set the cruise control and just sit back and not really pay much attention to the road, but no one in their right mind would drive that way even though many who are otherwise at least decently intelligent will drive their stocks in such a manner.
We would not even want to pretend to tell you that Alphabet or any stock will be a good play in 2020, only that it looks that way now but these things are always subject to revision. This does mean jumping on or staying on for now but also keeping an eye on the road and pull over if needed rather than ending up in the ditch if the weather turns bad enough.
Alphabet as a company will be fine, and they have such a command of their markets that left-wing politicians who hate big companies by nature are hoping to break them up on bogus charges of restraint of trade. Alphabet is a company that enables, not restrains trade and drives a massive amount of traffic to web sites big and small, and does so in a way that is even hard to imagine how this could slow down all that much.
However, the weather does matter as well, and if the market overall turns sour, Alphabet’s very strong business won’t really help them, and the extra excitement that people have priced into their stock leaves them subject to taking a hit along with the market. Tech stocks generally take a bigger hit, but Alphabet tends to hold up better than not only your average tech stock but your average stock as well, and they only gave up 16% during the mini-bear market of 2018 versus the 20% that the S&P 500 lost.
Losing money over a quarter still hurts, and while the majority of investors just ride out these things and end up higher once things recover, we still owe it to our readers to suggest that they may benefit from paying attention to these things and especially not be stubborn if we get a real bear market this time, and see a time where it is simply better to step back and dodge these punches that are being aimed at our faces.
With Alphabet being up 2700% over the last 15 years, it hasn’t exactly been a terrible idea just to hold it, and aside from the 2008 market crash, there really hasn’t been many real punches thrown at this stock that investors who are watching what is in front of their faces would have wanted to dodge.
Even so, when your stock loses over 60% over a time, as happened to Alphabet in 2008, at a time where there was panic in the streets with stocks that ran so deep that even people who don’t follow stocks were in its grip, we might not want to stand in there boldly and be used as a punching bag when we can just go home and wait for a better time.
If we get such a thing or anything close in 2020, or at any point in the future, this is where we need to get ready to bail, and this particular strategy does not involve looking to time the stock beyond just looking to leave the building when it catches fire rather than to stay in it and breathe in a lot of thick smoke that is not so healthy for our lungs.
This is a Great Stock if You Want to Just Hang on to Something in Almost All Weather
Whenever strategies are recommended for playing a certain stock a certain way need to account for the capacity of those who are supposed to be taking the advice, and we don’t want to be asking readers to go beyond their interest or capabilities in looking to time stocks all that much, at least in general articles about the desirability of lack thereof with a pick.
Alphabet’s month of May is a good illustration of this, as those who had their ear to the ground more would have stepped aside and avoided most of the losses that occurred then, especially given that the market went the same way due to concerns about such things as the trade war, bond yield inversions, the bull market lasting so long already, and so on.
If you’re going to exit in the first week of May when we clearly broke the trendline, that’s not really investing in the way we normally, define it, and this strategy will also require a number of other exits along the way. Holding this since 2009 would have delivered 900% though with Alphabet, and that’s a pretty nice return for doing nothing but watching and counting your money, and this is a strategy that much better suits investors overall than trying to be a trader with no real skills or training, which we clearly do not recommend.
Still though, these skills can be developed, although almost all investors are at the level of unconscious incompetence, which is also the level that traders start out at and remain for the short life of their trading careers typically. Knowing that there is much to learn is the first and necessary step to going out and learning it and applying the lessons to your benefit.
With that said, while we might not want to look to manage physical ailments ourselves, there is a threshold of pain that can arise that takes far less skill to manage, such as your putting your hand on a hot burner, where it’s not hard at all to know what to do in this situation. Investors who are very keen on just holding may not want to manage the May 2019 scenarios, or even the last quarter of 2018, but they do need to be ready to take their hand off the burner if it gets hot like it did in 2008, and not burn their flesh so badly as so many others insist on during these crises.
Other than the potential for such things, and we may see the stove get pretty hot indeed depending on the response to the 2020 election, Alphabet is certainly a stock that we can confidently just put on cruise control and just cruise. Their revenues and earnings continue to grow very nicely, their earnings multiple is a little above average but not out of line at all with their level of growth, they have new and exciting things in the pipeline to keep things growing, and they may even get more aggressive with buybacks now that Page and Brin have stepped down.
While some of Barron’s top 10 picks may be questionable, this one is not, and while we never want to lock ourselves in a closet with a stock where the door remains locked for a certain time like 2020, this has been an elite stock for many years and there’s little standing in their way right now with seeing this continue into 2020 and beyond.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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