Pairs Trade: Long Google, Short ValueClick

Includes: CNVR, GOOG
by: Intelligent Speculator

After closing out four trades within a few days of each other, I have the opportunity to open some new ones and today I am happy to say that I had an easier time to find a good trade opportunity. I’m not saying that it will necessarily work out better, but it did seem fairly obvious when looking at my dashboard among the stocks that we follow. Our return has been amazing so far this year, at close to 150% on an annualized basis. Seems too good to be true and it probably is, but let’s hope that things can continue to go well as the earnings season continues. I was somewhat tempted to go long Amazon (NASDAQ:AMZN), which I love, but it is difficult to pair these days, given its profile (the best candidate I see is Netflix (NASDAQ:NFLX), but I can’t see myself shorting the stock). As well, Amazon is reporting earnings tomorrow, which I am very much looking forward to seeing.

Back to today’s trade, though, let’s take a look at the numbers that we used:

Ticker Name Price EPS PE Ratio PE Next Year Return YTD Sales Growth Analyst rating Book Value Beta
VCLK ValueClick 18.78 0.99 17.75 15.46 17.40 1.91 3.8 5.92 1.25
GOOG Google 618.23 26.69 21.90 14.41 2.19 23.98 4.74 205.5 1.06

Long Google

Last week’s earnings announcement and calls were incredibly positive on all fronts; despite continued worries about rising costs, revenues seem to be keeping up so far thanks to display ads among other things. I have also been impressed with Google+ so far. For Google to even have a decent shot at social is a very big deal. My biggest worry in buying Google has to be the fact that the stock has already risen so much in the past few days and could have a letdown. However, on a valuations basis, I still think the stock is incredibly attractive with revenues growing at over 20% per year and an anticipated 14 forward P/E ratio. I understand that many doubters still think that Google has too much going on and too much competition, but the reality is that it is making huge progress in display, mobile and now social while it is keeping its huge lead in search despite Microsoft’s (NASDAQ:MSFT) online division pumping in hundreds of millions to help out Bing.

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Short ValueClick

ValueClick remains one of the important players in the online advertising field but it has been unable to show off much to make me think that growth (which has been non-existent in the past years) will eventually pick up again. It has few properties, its products are not being improved, it is losing sales people and its technology is falling behind. A turnaround is always possible but I just don’t think that the odds are very big that this will happen. It certainly does not warrant a P/E ratio that is comparable to Google’s. How in the world is that justified? The company has been hiring, but it remains unclear what ValueClick’s edge is when it competes with companies such as Google, Facebook, etc. ValueClick will be reporting results on August 2 so that should certainly be an interesting day for this trade.