Alphabet Spells Potential

08/25/2016 7:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Unlike many companies, this recommended tech stock shows little concern about massaging investor expectations. It declines to offer a formal profit outlook or guidance on the metrics analysts use for their financial models, states Richard Moroney, editor of Dow Theory Forecasts.

Alphabet (GOOGL)will also invest heavily in projects that may take years to pay off — if they do at all.

That attitude can occasionally lead to messy results, such as in the March quarter, when the internet search giant missed analyst forecasts for earnings per share and sales.

But Alphabet got back on track in the June quarter, as both per-share earnings and revenue rose at least 20%, comfortably topping consensus expectations.

Alphabet’s Google search business is one of the biggest beneficiaries of the shift to online spending.

The company continues to dream up new ways to boost online activity, from beaming the internet to remote regions via balloons to transmitting the internet through eyeglasses and automobiles.

Based on Quadrix – our proprietary quantitative ranking systems – the stock’s Overall score has rebounded from 58 at the end of May to 87, helped by improving ranks for Momentum (94 versus 67) and Earnings Estimates (96 versus 29).

The stock’s low Value score of 34 is somewhat misleading. At 25 times trailing earnings, it trades in line with the median for S&P 1500 internet companies.  Excluding net cash of $105 per share, the stock’s trailing P/E ratio is 22.

Analyst estimates are rising, with the consensus projecting earnings per share of $8.63 in the September quarter, up 17% on revenue growth of 18%.

Alphabet, already rated a long-term buy, is being added to our Focus List of top long-term buy recommendations.

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By Richard Moroney, Editor of Dow Theory Forecasts

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