Google: 192 Hedge Funds Go Long

| About: Alphabet Inc. (GOOG)

Everyone has an opinion about hedge funds. Most of the time the title has a somewhat negative connotation among other investors. Maybe it is because they are so extremely aggressive and unregulated. Or because they short good companies, and cater to the "super rich". Even though the very first hedge funds shorted a bear market to reduce risks, they are now very speculative and are considered riskier than the rest of the stock market. With more risk comes more reward (or not):

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

But now according to an article in Thursday's WSJ, PIMCO the world's largest, most conservative bond fund manager (by assets) is considering "riskier alternative investments". This is due to the SEC lifting restrictions on hedge fund activities next month on September 23:

The SEC moved last month to lift a restriction prohibiting hedge funds, private-equity firms and other businesses from publicizing shares in private offerings as part of the Jumpstart Our Business Startups Act, effective Sept. 23. That allows Pimco and others to pitch alternative products more directly to institutional investors as well as wealthy individuals. "The world is going to change here because of the JOBS Act," PIMCO CEO Douglas Hodge said.

Last week I wrote about a Goldman Sachs study on the 50 companies that were most shorted by hedge funds. However as a whole, those 708 hedge funds in the Goldman Sachs study invested twice as much money in long positions as they did in short positions. The long positions were $1 trillion versus $500 billion in short investments. Here is another list from the study via the Wall Street Journal Moneybeat which shows the 50 stocks that those hedge funds "loved" the most:

Company Ticker Market Cap Millions # of Hedge Funds Owning Stock Total Return YTD
Google Inc. Class A GOOG 235,494 192 22%
Apple Inc. AAPL 452,350 174 -5%
American International Group, Inc. AIG 69,448 174 33%
Citigroup Inc. C 154,667 149 29%
General Motors Company GM 47,822 133 20%
JPMorgan Chase & Co. JPM 200,594 121 24%
Bank of America Corporation BAC 153,842 116 24%
Microsoft Corporation MSFT 264,809 115 22%
QUALCOMM Incorporated QCOM 114,848 110 9%
Pfizer Inc. PFE 190,665 105 18%
Visa Inc. Class A V 89,502 105 15%
Anadarko Petroleum Corporation APC 44,841 101 20%
Hertz Global Holdings, Inc. HTZ 9,925 100 52%
Oracle Corporation ORCL 151,566 92 -1% Incorporated PCLN 48,349 92 51%
eBay Inc. EBAY 68,843 90 4%
Cisco Systems, Inc. CSCO 130,856 89 26%
MasterCard Incorporated Class A MA 71,770 89 26%
Yahoo! Inc. YHOO 27,694 88 36%
Schlumberger N.V. (Schlumberger Limited) SLB 108,488 87 19%
EMC Corporation EMC 54,165 87 3%
Twenty-First Century Fox, Inc. Class A FOXA 48,270 86 42%
Express Scripts Holding Company ESRX 52,084 86 18%
Gilead Sciences, Inc. GILD 87,077 86 55%
Delta Air Lines, Inc. DAL 16,756 85 65%
Liberty Global Plc Class A LBTYA 16,912 85 20%
Wells Fargo & Company WFC 228,268 82 29%, Inc. AMZN 130,884 81 14%
Occidental Petroleum Corporation OXY 70,093 81 15%
Hess Corporation HES 25,834 80 42%
Freeport-McMoRan Copper & Gold Inc. FCX 33,129 80 -1%
Liberty Global Plc Class C LBTYK 12,011 80 23%
CBS Corporation Class B CBS 29,390 79 37%
General Electric Company GE 244,411 79 16%
DISH Network Corporation Class A DISH 9,665 78 22%
Comcast Corporation Class A CMCSA 91,756 78 16%
EOG Resources, Inc. EOG 42,658 76 30%
Johnson & Johnson JNJ 252,359 76 30%
Zoetis, Inc. Class A ZTS 15,010 76
HCA Holdings, Inc. HCA 17,177 76 27%
LyondellBasell Industries NV LYB 38,758 76 21%
The Procter & Gamble Company PG 220,415 75 21%
Exxon Mobil Corporation XOM 388,048 74 4%
Merck & Co., Inc. MRK 140,378 74 19%
The Williams Companies, Inc. WMB 24,151 73 10%
The Coca-Cola Company KO 173,292 73 9%
Equinix, Inc. EQIX 8,198 72 -20%
Monsanto Company MON 52,271 72 5%

This list could be used by investors to find long or short positions. Right now Google is the hedge fund's top pick for a long position. And Apple is number 2. Both companies are headed higher or lower depending on who you listen to. According to Fusion Research Google dominates the digital ad market and 88% of its revenue comes from ads which specifically target Google search engine users based on what they are searching for. This will add a lot of new ad revenue:

Google has been eating up Yahoo!'s (NASDAQ:YHOO) search market share, which declined from 11% in 2008, to 4.9% in 2012. Google's expertise in monetizing search AdWords has resulted in the company's dominance in the search ad market, and 88% of its total advertising revenue in 2012 came from this market. The company is also known for its various search engine technological upgrades; these enhance the search experience and benefit marketers. In July this year, Google rolled out an important update to its AdWords called Enhanced Campaign. This update allows advertisers to better target their audience...

On the July Conference Call, Google SVP and Chief Business Officer Nikesh Arora said that Google Play has been a huge success. Digital ads and content are really growing and beginning to pay off. More than 50 billion apps have been downloaded from Google Play in over 190 countries:

In the last year Google Play digital content like music and movies has launched in 21 new countries including India, Mexico, Russia, with eight more European countries launching Google Play books this week. Publishers like Penguin, Random House, Time Inc. movie studies like Disney and NBC Universal, and app developers like King and Square Enix are creating terrific experiences for our users. We've also collaborated with all the major record labels to launch a new music subscription service that users seem to be enjoying really -- enjoying a lot.

The company has had an amazing year, solidly beating the rest of the market indices:Chart forGoogle Inc.

The P/E ratio is 25 with a forward P/E of 17, and revenue expected to hit almost $60 billion for 2013. However, EPS is only estimated to be $43.54 compared to $39.82 for 2012:

Earnings Est Current Qtr.
Sep 13
Next Qtr.
Dec 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate 10.37 11.83 43.54 51.34
No. of Analysts 40.00 40.00 42.00 43.00
Low Estimate 8.66 8.63 40.25 43.51
High Estimate 11.37 13.67 47.95 56.34
Year Ago EPS 9.03 10.59 39.82 43.54
Revenue Est Current Qtr.
Sep 13
Next Qtr.
Dec 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate 14.82B 16.67B 59.62B 69.75B
No. of Analysts 27 27 32 31
Low Estimate 14.24B 15.86B 58.22B 66.85B
High Estimate 15.34B 19.08B 62.26B 76.71B
Year Ago Sales 11.33B 12.16B 42.72B 59.62B
Sales Growth (year/est) 30.80% 37.10% 39.60% 17.00%


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The new Moto X should bring in a lot of new revenue without alienating other Android partners. It is rumored that Google's marketing budget for this sexy new phone is going to be $500 million. Google CEO Larry Page said that they are very excited about it. The phone does not need to "wake up" for you to check the time or notifications because everything is always on and showing. It is currently available at AT$T (NYSE:T) for $199 with a two year contract.

According to Slate Magazine on Thursday, Google's recent investment in Uber has more potential than most analysts realize:

Google's eye-popping $258 million investment in the car-hailing app company Uber made headlines last week. It's the search giant's biggest-ever venture capital investment, and it gives a much-discussed but rather small-scale company a delirious $3.5 billion valuation. But so far, the commentary on the deal-which has been mostly focused on bubble speculation and startup mania-has missed the real story. Google's interest in Uber is likely connected to their ongoing investments in driverless or autonomous cars, and it shows that the potential of this technology is much greater than is commonly realized.

But not everyone is bullish on Google. The shares dropped from a 52 week high of $928 after the July earnings report. Bill Maurer predicted this drop and advised shorting the stock due to the way that Yahoo Finance had originally used non-GAAP numbers for Google, and then switched to GAAP. And now he maintains that the estimated gains YOY (chart above) in Google growth for 2013 are still overestimated by Yahoo:

Thanks to the revenue and earnings misses, analysts have taken down their estimates on Google since the Q2 report. The 2013 revenue average has been cut from $60.24 billion to $59.62 billion, and the 2014 revenue number has been trimmed from $69.85 billion to $69.75 billion. The revenue numbers are GAAP, but Yahoo's showing for the prior year period (2012) number is non-GAAP, so the 2013 growth figure is wrong, but the 17% growth number for 2014 is right.

Recommendation Trends For GOOGLE:

Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 11 11 9 10
Buy 21 21 19 18
Hold 12 12 12 12
Underperform 0 0 0 0
Sell 0 0 0 0

Data provided by Thomson/First Call

So where is Google headed now? Currently 32 analysts recommend it as either a Buy or Strong Buy. While 12 say to Hold, no one is saying that it will underperform or that it should be sold. That does not mean that they are right. However, the company has a lot of good products and services that continue to pay off. The revenue is there if they can just rein in the expenses. The hedge funds love it, but they live and breathe risky speculation. A lot of investors are waiting for a stock split to jump in, but I think the price will take off before that if there are solid sales with the Moto X, and mobile ads.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.