Alphabet Inc (GOOG)

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Bull of the Day: Alphabet Inc. (GOOGL)
By: Zacks Investment Research | January 3, 2019

Stocks have looked stronger in recent trading sessions, lifting hopes that the worst of December’s selling would not extend into the New Year and encouraging investors who were looking forward to a strong 2019.

If the bottom does indeed hold, it won’t take long for Wall Street to jump on the newly-created bargains formed by market-wide volatility. And one area that is sure to attract bargain hunters is large-cap technology, which was previously one of the market’s hottest segments.

An example of a tech behemoth that looks attractive in the wake of the selloff is Alphabet Inc. (GOOGL). The Google parent is sporting a Zacks Rank #1 (Strong Buy), and its shares are trading on the cheap right now.

The foundation of the Zacks Rank are earnings estimates and earnings estimate revisions. When analysts become more optimistic about a company’s earnings outlook, typically that’s a bullish indicator for the stock.

But earnings trends take time to develop, and share prices move up and down every day, so an even better way to capitalize on estimate revisions is when a stock has not yet followed the bullish move in earnings estimates.

Here’s a look at GOOGL’s share price history overlaid with its earnings outlook:



What we have here is a divergence between the share price trend and the earnings trend. While Alphabet’s earnings outlook for 2019 and 2020 has moved sharply higher in the past month, the stock is down about 6.5% in that time.

This is a solid indicator for timing when to buy a stock, since share prices and earnings estimates eventually move in the same direction most of the time. We can already start to see this with GOOGL, as the stock found a bottom during the Christmas Eve selloff and is on the move higher.

Luckily though, Alphabet still looks cheap compared to its recent valuation history:



This is another advantage to buying on the rebound. As we can see, GOOGL is not only cheaper than its industry’s average earnings multiple, but also below the stock’s average valuation over the past 52 weeks.

If those two indicators weren’t enough, Alphabet also sports impressive growth prospects. The internet behemoth is expected to finish the current fiscal year with EPS growth of 31%. That bottom-line growth is projected to continue to the tune of 13% in the upcoming fiscal year. Analysts are also estimating that Alphabet will see 20% revenue growth in 2019.

Alphabet is the king of internet search, and its core advertising business is firing on all cylinders as the number of connected devices continues to grow. But Alphabet’s growth outlook for the next few years feels more a result of the company’s new initiatives, including its hardware products. The Pixel phone is certainly a powerful device that runs on a familiar platform, while the Google Home is a massively popular automation assistant—just to mention a few things.

The truth here is that Alphabet is among the FAANG stocks that led our relatively smooth bull market for years. December’s volatility stopped just short of ending that bull market, but it’s clear that the extent of its remaining life is uncertain. Nevertheless, we should expect the stocks that have steered the ship for years to serve as a primary signal of that life.

If Alphabet’s recent bottom holds, that’s good news for other tech stocks and the broader market, and that will reinforce the fundamental argument we just laid out here.

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