Now that we just survived the worst week ever of the U.S. stock market (barely), the questions on everyone’s mind: Have we hit bottom? And what stocks are a great buy now?
My colleague Gene Marcial devoted his column this week to asking the question about Google, whose shares ended the week at $332. In April, Google traded at $555. At its current price, Google is trading at a price-earnings ratio of 14.9, based on Zacks Investment Research’s estimated 2009 earnings of $21.03 per share, down from its p-e ratio of 34.6 at the end of 2007.
Marcial’s conclusion: “Without a doubt, the selling in Google shares appears to be overdone. Street analysts think so. Of the 34 who follow Google, all except one recommends buying the stock as of Oct. 8, according to Bloomberg. The one dissident rates Google a hold.
At Google’s currently depressed price, investors need not search far and wide for a truly beaten-down stock that is as underpriced as this Internet behemoth.”
Right now, I am not recommending anyone buy any stock. There’s still a lot of fear and panic in the air, and uncertainty about where the economy is headed. But at some point the selling has to abate and people will start wading back into the market. Now is the time to do your research and draw up a short list of potential investments.
The key question for Google is figuring out how big of an impact the recession will have on online advertising spending. eMarketer cut its forecast for online ad spending three times over the last year. Its most recent forecast, announced in August, calls for 18% annual growth to $24.8 billion, down from 25% growth last year.
So Google is not immune from the slowdown.
On the other hand, Google is starting to see some modest success with some of its new businesses, such as offering Web-based applications. Its performance-based ad model is showing resilience in a deflationary cost-conscious economy. And it is likely to continue to pick up market share from search rivals Yahoo! and Microsoft. So it seems like an above-average growth rate of 20% to 25% would warrant more than an average 15 p/e ratio.