GOOGLE overvalued? Too much too fast? Due for a pullback? Maybe Not - according to Cramer.
Where Bears Went Wrong on Google
By James J. Cramer
RealMoney.com Columnist
11/23/2005 12:39 PM EST
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Google bears went wrong on the mechanics of growth buyers and the inability to duplicate the growth of Google.
Fund managers have to slap a valuation on it, have to own it and have to use comparisons for their valuations.
And only UnitedHealth has Google's kind of growth; it's that rare.
What a tough life the Google bears have. They most likely hated it at $150, despised it at $250, wanted to crush it at $350 and simply can't bear to see it at $430, or $440 or wherever it is going today. The increase has been so stunning of late -- remember, it was just at $400 on expiration and dipped into the $390s on the "important" Barron's piece last weekend.
But let's think about Google, and where the bears went wrong. It's not just a problem of perception or valuation that tripped them up. It was the mechanics of growth buyers and the inability to duplicate the growth of Google that really got the bears right in the carotid artery.
My thesis for valuing stocks always starts with the necessity issue: Because a common stock of some visibility --- and this one certainly has that ---will have to be valued by managers who are attempting, at all times, to beat the averages, it is unavoidable that some valuation gets put on. If you approach it like that, rather than say "It is absurdly valued," you at least have a starting point for understanding the rise.
Managers only know comparison shopping. They accept the valuations that the market currently places on like merchandise, and why shouldn't they? When you are buying or selling hundreds of millions of dollars of merchandise each day, you tend to believe the posted price. You don't think it is chimerical.
Of course, some of the bears simply just say, "It can't be worth X, no matter what." To me, that's circular reasoning, in that it is worth, at that moment, what the market's paying.
More important, though, what people have to understand is that if you own a stock with a relative set of growth stats that are inferior to Google's, but you are paying more for that stock than you are paying for Google's 2006 earnings, your discipline tells you that you are wrong. You should sell that stock and buy Google. We can't second-guess that portfolio discipline, because it is why we were hired and why we were given money. If anything, it may actually be what we held ourselves out to the Hennessee types as, and we can't violate that without risking asset pullout.
That's why Google's rise seems inexorable to me. You still have lots of stocks that are more expensive than Google with growth stats that aren't as good.
Moreover, as I said at the beginning of this year, I can't come up with too many situations that organically have growth that is accelerating. I have lots of situations with consistent growth and lots of situations with stuttering growth, and still other situations that might grow faster if the Fed does something or the dollar does something. But this and UnitedHealth Group (UNH:NYSE - commentary - research - Cramer's Take) are the only two situations that I know that are built into the cake going into the year.
All of these explain why the bears had to be wrong.
Of course, we know from 2000 that earnings can slip up, even for the most loved of companies and stocks. And we know that there should be some cutoff to what we are willing to pay for earnings. But why should it be 50 times, which is where I think Google is going?
I have, actually, most of my life, used the rule of thumb of twice growth rate as the upper limit for the price-to-earnings ratio, which means 66 times earnings for Google! I don't talk about that only because I don't want to sound too absurd, even though I know it's the logic behind many of the buyers.
I believe that we all would be willing to shunt this from our eyes if we split 10-for-1, but we aren't, so I will see you at $450! |
