Google stock up

[glatt]

I like Google. I "value" the company. But I sure don't understand how the market determines the price. Yeah, I know. The market is what someone is willing to pay. But look at the numbers.

Google reports that for each share, there was a $1.29 profit for the last quarter. Good news. Better than expected. Wall Street expected a $.78 profit. That's $.51 more per share than was expected. The stock should go up a bit as a result. I would expect the stock to go up $.51 per share plus there would be a little bounce because people might think that since Google was surprisingly profitable this quarter it will always be that way. But the stock has gone up about $30-40 in the week since the news was announced. How do you get $30-40 out of $.51?? Google would have to keep up that profit for 80 quarters, or 20 years to justify that increase in share price. Google is good. But it's not that good.

Obviously, everyone on Wall Street disagrees with me, because the price is what it is.

I don't get it.

[lookout123]

no, not everyone on wall street thinks google is worth it. a lot of people who think good investing means looking in the rear view mirror think it is worth it. these are the same people that were threatening to pull their accounts from me when i wouldn't sell them TASR in the $50's and SIRI above $8.

speculation makes some people very very wealthy on the backs of those who won't listen to the voice of reason. especially in companies with short trading histories and/or limited circulation.

example:

Mr Customer: i think (real tech company) will go to $120.
Advisor: why?
Customer: because it went from $9 to $75 in only 3 years, with that head of steam how can i lose
Advisor: because... stream of logic, facts, figures, etc...
Customer: I'm buying from someone else at $75


5 years later:
Customer: why didn't you tell me (real tech company) was a bad idea? it fell from $75 down to $1.95, insert rant about brokers screwing people over.
Advisor: WTF?!?!?! get out. take your account with you.


2 weeks later:
Same customer: hey (search engine company) went from $85-105 in the opening hours. it has been solid for 6 months and now it is above $200. i want in.
Advisor: why?
customer: i hear it could top $300.

THWACK!
*sound of bat hitting side of customer's skull*

[xoxoxoBruce]

Originally Posted by glatt

I like Google. I "value" the company. But I sure don't understand how the market determines the price. Yeah, I know. The market is what someone is willing to pay. But look at the numbers.

Google reports that for each share, there was a $1.29 profit for the last quarter. Good news. Better than expected. Wall Street expected a $.78 profit. That's $.51 more per share than was expected. The stock should go up a bit as a result. I would expect the stock to go up $.51 per share plus there would be a little bounce because people might think that since Google was surprisingly profitable this quarter it will always be that way. But the stock has gone up about $30-40 in the week since the news was announced. How do you get $30-40 out of $.51?? Google would have to keep up that profit for 80 quarters, or 20 years to justify that increase in share price. Google is good. But it's not that good.

Obviously, everyone on Wall Street disagrees with me, because the price is what it is.

I don't get it.

I remember reading in Barrons, a long time ago, there is(or was) an accepted formula for determining the stocks value. From that you could buy undervalued and avoid overvalued stocks. Except when your cousins, mistresses, bookies, shoe shine boy had an inside tip, of course.

[smoothmoniker]

Originally Posted by xoxoxoBruce

I remember reading in Barrons, a long time ago, there is(or was) an accepted formula for determining the stocks value.

This sort of thing worked much better a generation ago when most investing was done by institutional managers who controlled large accounts and made decisions based on P/E ratios, and other new-fangled fancy math stuff. Today, the shift has moved toward alot of people with 10k in an e*trade account making their own trading decisions, and they're not being at all reasonable or sophisticated about it. In that type of scenario, public sentiment about your company is a real factor.

There's a phenominal book called "Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality" by Terry Burnham. It analyzes how animal instinct (pattern recognition, fear of failure, fight or flight response) influences mass market decisions.

-ml

[Beestie]

Originally Posted by xoxoxoBruce

I remember reading in Barrons, a long time ago, there is(or was) an accepted formula for determining the stocks value.

Those principles are as valid today as they were then. The economics of what a company is worth are as fundamental as geometry. The old equations allow one to "plug in" things like asset value and growth potential but before the computer revolution, those two variables could usually be quantified with reasonable precision. Today, however, the variability in how those two things are measured is exponentially greater.

We can both look at all the assets on General Motors balance sheet and decide what we think they are worth and our answers would probably be pretty close. Try it with Google's assets and the answers would probably be very different as will our answers on the future revenue Google can squeeze out of those assets.

[lookout123]

what you are talking about is generally termed "fundamental investing".

fundamental investing - look at the company, you are considering for purchase. look at the books, the products, the management, the competition, catalyst for improvement, etc. make investment decisions based on assessed value of company and expectation of future earnings. usually associated with a measured "buy and hold" investment philosophy. believe in long term capital appreciation combined with a strong dividend focus will outperform other methodologies in the long run.

technical investing - look at a stock. consider the stock's action in relation to the market, to it's peers, to the economic cycle. look for patterns and catalysts to make the stock price move. make investment decisions based on charts, graphs, and trends. usually associated with active traders who believe they can capture capital gains and avoid losses by properly interpreting the charts.

[tw]

Originally Posted by Beestie

We can both look at all the assets on General Motors balance sheet and decide what we think they are worth and our answers would probably be pretty close.

Many previous analysts have concluded that GM was worth more broken up into parts. However GM was structured to make a breakup too impractical - too difficult. Its rather weird to think breaking up a company makes it more profitable. However Carl Icahn tried it and backed off quickly after learning these details. The numbers suggested it would be profitable. Once he got into the details, those numbers no longer made sense.