I recently took profits on a long position I have had on Google (GOOG), and with so many fighting for shares of this industry pioneer and market maker, many would say I missed out on the opportunity to realize even more gains. Obviously, investing requires an appetite for risk which is unique to each person. After a review of the stock in the context of current economy, the risk of downside in Google's stock price outweighs the potential for its growth. I harvested profits because I see a price dip and buying opportunity in the short term for this stock and the broader market as a whole. One can never overlook the stock's bear case against otherwise better short term opportunities elsewhere.
The company has overcome competition from Apple, Inc. (AAPL) and is poised for further growth as it continues to innovate in many areas from the laptops and phones they sell to the social media and internet search they harness. The company's stock has been brilliant to own for nearly everyone as it profits from innovation. Despite all of this, Google is not without weakness, and of course faces serious threats. Yet the stock has exploded over the last 12-months, is up over 37% with a recent five-day spike of nearly 5%. This is despite earnings growth of 25% with expected earnings growth of less than 16%.
The Bear Case
It is important not to ignore the bear case for Google as we face confirmation of all-time highs in the S&P and associated SPDR index ETF (SPY). I see increased volatility in all US markets as investors fear what might happen when this broader index tries to break through major resistance to confirm the all-time highs reached in the Dow and SPDR index ETF for the DOW (DIA). Macroeconomic event risk is large, especially after this recent run for Google. The bear case has been sidelined, and many are expecting Google's run to continue to $1,000.00, especially with the Bernanke and Yellen and the Fed supporting the overall economy. The macroeconomic event risk is less than previous trips to this level in 2000 and 2007 when the market was allegedly less prepared for crisis. While these things may be true, Google is not immune if investors decide to bail on equities after a multi-year bull market.
If Google bulls are not convinced that macroeconomic event risk is a serious threat, they should still be concerned about just how large and powerful Google has become. The company is perceived as a threat by many governments. There is significant risk to Google's industry control and leadership as it has monopolized the industry it pioneered and may be more susceptible to legislation or governance from the United States, as well as other countries and international entities, than people think. This is a far greater concern than any intellectual property or competitive advantage threat from Apple or even Facebook (FB), as many have cited its growing search capabilities as a serious concern for Google. Even now, France leads a coordinated effort against Google's privacy practices. Other suits related to its Street View function within Google Maps are prolific and the threat that a government or group of governments beginning to legislate Google and their industry is increasing.
To the extent that the threats to this company are an afterthought, add to the downside risk the fact that the stock is simply overbought. The high RSI of 76.83 (10,1d) is the result of concerning low volatility (one-sided buying or selling means a low price spread and potential oversight of risk reversal potential) and the downside threat is a reality. With all of the great things going for Google, maybe the growing risks are still too small for most Google analysts to consider seriously, but no stock is bulletproof. A momentum change for this stock can happen fast, and can be quite severe. I will be long the iPath S&P 500 VIX Short Term Futures TM ETN (VXX) as the SPY encounters resistance at its all-time highs and will reconsider re-entry into a long position for Google when and if the price shifts down nearer to or even below its 50 Day moving average of $757.91.
The bears may even want to play the downside, but should avoid an overly short position. For a moderate play on this evaluation, as this stock increases in value, selling the stock short and paring long positions would be appropriate. A short position seems reasonable on a short term basis as the strategy stands to reap rewards from or hedge against a trip to the 50-day moving average.
Disclaimer: I have no business relationship with any company whose stock is mentioned in this article. I am not a professional advisor; my interpretations of the market are independent and should not be construed as advice.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VXX over the next 72 hours.