June 12th, 2007

Life Cycle Investing: Google (GOOG)

Google (GOOG), although more recently an IPO than Apple, has had a more spectacular and, so far, more consistent trading history than AAPL.

As a precursor of its novel approaches to problems, whether technical or business, August 19, 2005 was GOOG’s on NASDAQ through a little-known Dutch auction process with the stated intention of attracting a broader range of investors than the usual IPO. Almost immediately, the stock started marching to new high territory. It didn’t hurt that the market, as measured by the S&P-500 was also breaking through some resistance and about to make it’s assault on it’s all-time high resistance trendline. The stock nearly doubled within less than 60 days to 195.

GOOG formed an unusual, but very bullish, upward-sloping consolidation channel that, throughout its formation and until the breakout, was difficulty isolating with much confidence. In fact, there was a failed breakout about midway through the pattern.

But it was ultimately resolved with an upside gap breakout.

Ultimately there was a positive breakout leading to another 100-point, 50% increase in the stock to 317. And, again, a second upward-sloping consolidation channel was formed and, again, there was another gap breakout leading to a third 100 point increase, or 33% to 413.

On a longer-term perspective of the GOOG chart since IPO shows distinctly the channel from the IPO till it touched the upper boundary of the channel at the beginning of 2006, about 475% higher than the IPO and, along the way, the 2 upward-sloping consolidation channels about 100 points apart. This is the point of my first GOOG post on November 25, 2005 in which I wrote:

“There’s a universe of over 8000 individual stocks and EFT’s to chose from, many about to make significant gains by breaking through resistance trendlines and, therefore, have greater profit opportunities. Anyone putting money into GOOG at this time would, at worst, be assuming significant risk or, at least, incurring opportunity costs.”

Over the past 18 months later since that posting (and since peaking at 475 a weeks later in January 2006), GOOG has been struggling to maintain its upward momentum and has merely matched the S&P-500. While the S&P increased 17% between January 31, 2006 and June 12, 2007, GOOG increased 18% and has been much more volatile.

The stock is poised to breakout of this long-term multi-year consolidation; it is currently working its way through a retracement test of support at the previous all-time high. The Google lesson is that the best strategy (and the one taking the most discipline and guts) is to stick with this sort of stock where, regardless of external market factors (note the S&P corrections in Aug-Oct 2005, May-August 2006 and Feb-Mar 2007) is early enough in its product and business life cycle only suffers relatively minor retreats.

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  • Mitrax

    Thanks for the great post. I think Google is the top stock to invest in for the next decade. My investment portfolio is now about 60% Google, it seems incredibly cheap for a large-cap stock at these levels given the astounding potential growth rates over the next few years.