Class C shares of Google Inc. (NASDAQ: GOOG) staged a breakaway gap on Friday, closing the day up 14.3 percent with well over 10 million shares changing hands. Prices on Friday opened at $649 and traded as low as $645 before rallying again. This action saw a gap printed on GOOG price charts between Friday’s low and the stock’s previous all-time high of $603.17 reached in 2014, shortly after the 2014 GOOG stock split. GOOG stock was rallying on Thursday’s evening’s strong earnings report and price-target upgrades.
Investor’s Business Daily had calculated a buy point near $595 for the GOOG shares. However, shares started trading at $649 on Friday. Would GOOG still be a worthwhile trade so far above the buy point?
Investor’s Business Daily says, “In strong gap-ups, it’s fine to buy a stock that’s more than 5 percent past a proper buy point.”
The newspaper, founded by William O’Neil, recommends never buying stocks extended more than 5 percent above published buy points, with the sole exception being instances where stocks have staged a breakaway gap and opened above the buy price. Then the goal is to buy as close to the opening price the day of the gap, or lower, if possible.
Things change quickly in the stock market. Unknowable events can turn a great stock into a loser. Investor’s Business Daily recommends cutting all losses in the stock market to a maximum of 7 or 8 percent and never investing more than 20 percent of one’s portfolio in one stock.
Often, stocks with mediocre growth prospects may rally, or even gap, to new highs and then trade down on increased volume the next day, giving up the majority of gains: this is something GOOG does not appear to be doing. Some participants feel that a market’s reaction to a breakaway gap is more important than the gap itself. GOOG shares traded far into new high price territory on Friday on well over 11 million shares volume. Today, GOOG shares only gave back 1.5 percent of Friday’s 14.3 percent move and on approximately half the trading volume: near six million shares.
This means, in rough terms, that about five million shares of GOOG stock have been purchased in the last trading sessions at prices never seen before. Five million shares of GOOG stock carries a value of $3.32 billion or roughly one-fifth the size of the Fidelity Magellan Fund (FMAGX) and more than the GDP of many small countries. Institutional investors with the buying power to move stocks like GOOG 14 percent only do so when they expect to make money on their investment. The nature of the breakaway gap is that it is the mark of the largest investors being caught flat-footed, willing to throw $3 billion at a stock in one day. That’s confidence.
Breakaway gaps like GOOG shares experienced on Friday are caused by one thing and one thing only: growth. Analysts are forecasting sales growth for Google of 41.1 percent and 42.6 percent for the current and coming quarters and full year growth of 31.9 percent. GOOG earnings per share growth is forecast to come in at 28.5 percent next quarter and 12.70 percent this year. In fact, GOOG EPS growth forecasts beat out those for Facebook, Inc. (NASDAQ: FB), which is forecast to undergo EPS growth of 16.3 percent and 13.6 percent for the same periods.
Where FB shares have the advantage over GOOG is EPS growth over the next five years: FB EPS is forecast to increase by 28.4 percent annually, while GOOG EPS is forecast to grow at only 16.3 percent.
Do these sales and earnings growth numbers warrant the current GOOG share price of $663.02? Can the shares more higher?
[Photo Illustration by Scott Barbour / Getty Images]