My investment hero, Warren Buffett, argues that investors should “never bet against America”. He also states that an investor’s simple goal should be to “buy stocks in good companies at fair prices”. Thus, I’ve been trawling through the US S&P 500 index looking for great businesses with (temporarily) depressed share prices.
In other words, I’m on the hunt for what I call ‘fallen angels’ — solid companies whose stocks have been affected by selling pressure or negative sentiment. And I believe I’ve found one such candidate within the group of mega-cap tech stocks known as the Magnificent Seven.
Good old Google
Alphabet (NASDAQ: GOOG) is the owner of ubiquitous search engine Google, used by billions of people worldwide every day.
Alphabet also owns the world’s biggest video-sharing platform, YouTube, and mobile operating system Android — as well as a host of other digital products and services. The firm is also making strides in cutting-edge tech such as artificial intelligence, quantum computing, and robotics.
Despite its many divisions and projects, Alphabet’s real strength lies in online advertising, where it is the global leader. Alas, a US legal ruling claims that Google’s market leadership amounts to an illegal monopoly in online search and advertising.
Then again, is this likely to lead to massive fines and even a break-up of Alphabet during this presidential term? I say not, as President Trump is famously pro-business and anti-regulation. It’s this belief that leads me to conclude that Alphabet shares are too cheap right now.
S&P 500 shares slump
As I write (23 April), Alphabet shares trade at $159.41, valuing this internet Goliath at over $1.9trn. This is almost a quarter (-23.6%) below the stock’s all-time high of $208.70, set on 4 February. To me, this is a price slump that has gone too far, too fast. If only I’d been able to buy the shares when they crashed to their 52-week low of $142.66 on 7 April. Oh well.
This leaves this popular S&P 500 stock trading on a modest multiple of 18.6 times trailing earnings — the lowest by far among the Mag 7. A modest dividend yield of 0.5% a year provides a little income, but I see Alphabet as a growth stock. And if revenues, earnings, and cash flow starting growing strongly again, then the shares could follow suit.
Then again, if I’m wrong, then an adverse ruling against Alphabet would be disastrous for shareholders. A forced break-up of the company could destroy its franchise, synergies, and network effects. Even so, I’m quietly confident this won’t happen yet — fingers crossed.
For the record, my wife and I have owned Alphabet stock since 3 November 2022, the very day it hit that year’s low. Today, we are sitting on substantial profits, but we regard our stake as a core long-term holding. In summary, we will hang on tightly to this S&P 500 stock and await developments!
