Going for Google?

09/17/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

"I've found the recent Google IPO to be a pleasant diversion from an almost unbearably dreary market," says Bernie Schaeffer. Here, along with analyst Joe Sunderman, he looks at the trading prospects for the Internet search firm as a newly public entity.

"Wall Street has been more than willing to pronounce stumbling, no-growth tech names like Microsoft, Cisco, and Intel as ‘undervalued,’ yet the analyst community turned into 'valuation nannies' when it came to the IPO of Google (GOOG NASDAQ). Contrarians should take serious note and recall the various lousy IPOs that were highly favored by the "investment community" during the bubble. Recently, a technology oriented brokerage firm declared they would not be a buyer of GOOG until it traded down to $92 stating that ‘its history of dealing with high-beta stocks has taught it to be price sensitive when looking for entry points.’ This is the very same ‘entry point strategy’ that would have forever kept investors out of names like Microsoft and eBay as they proceeded to rally to hundreds of times their IPO levels.

"Now that GOOG shares are trading well above their IPO level, the hand wringing is being directed to such matters as the unusually short lockup period, after which insiders can unload their shares. My fearless forecast is that the Wall Street analyst community will fall in love with Google shares before they ultimately top out. This is actually not a very bold prediction, as it happens time after time in these situations. They hated AOL stock after it went public, dismissing it as ‘overvalued.’ And then they loved it at its peak when it merged with Time Warner, after it had already appreciated 20-fold."

Adds analyst Joe Sunderman of Schaeffer's Investment Research , "In the weeks leading up to its highly touted initial public offering, numerous media analysts held a very negative opinion of the pending launch of Google. This was an unusually high level of negative sentiment toward an IPO that, in years past, would have produced an enormous amount of bullish hype. Despite all the debate in the media, Wall Street continues to give GOOG the cold shoulder, as only three analysts currently follow the firm. Additional coverage from this bunch of hold-outs could send the equity soaring higher. Options players are even betting against the security, as covered call and put purchases dominate GOOG's options sentiment picture.

"From a technical standpoint, GOOG surged into the top of its expected range during the equity's IPO on August 19, climbing more than 18% before the closing bell. The equity has subsequently been adding to these gains, as those investors who didn't participate in the stock's IPO continue to snatch up GOOG shares. Fellow Internet concerns such as Yahoo! and AskJeeves are currently in a strong two-year uptrend versus the NASDAQ, on a relative-strength basis. We expect GOOG to outperform its competitors and the NASDAQ from this point forward. Given the continued high levels of pessimism toward the security, we believe that GOOG will continue its advance as bearish sentiment toward the stock unwinds. Traders should target a move to 121 with a stop-loss on a trade below 98."

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