Investors should buy stocks because they are trading below their intrinsic values, not because they are fascinating or because they come from sexy industries.
We can think of Google (GOOG) as an example of a cool stock. Its various forays into fascinating industries and new technologies may captivate the general public but should be regarded as a red flag for value-sensitive investors. Don't follow Google's leadership as it boldly goes through research and development binges while its shares trade at rich valuations.
There are other, more boring stocks from more boring industries which trade at more attractive valuations. Though they do not get the press that Google does, analyst estimates and historical trends are greater than or equal to Google. Instead, investors should dare to find stocks whose valuations and future prospects offer them the best value for their investment dollars.
Google's Latest Science Fiction Venture: Future Cars
California recently joined Nevada as the second state to license the use of driverless cars on public roadways. The new law officially allows Google's prototype of a self-driving car on the roadways as long as there is a licensed human driver inside of the car to take over if something should go wrong. The car stays aware of its environment and other drivers with a complex system of laser rangefinders and video cameras.
Is this cool? Absolutely. Even California Governor Jerry Brown declared at the official signing, "Today we are looking at science fiction become tomorrow's reality."
The important question investors should be asking is whether Google stock offers them a compelling risk/reward tradeoff relative to other stocks.
We can screen for stocks that have greater historical sales growth trends and lower valuations than Google. As long as these fundamental valuation metrics are based on sound accounting, screen results are valid alternatives to Google as stock investments.
Should we care if they are in the same industry as Google? No, certainly not. Your bank account doesn't care how you earned your investment returns. When you use returns to pay your grocery store the cashier won't care either. Is there anything magic about Google or its industry? If there was, it would be captured in earnings estimates or in the company's valuation metrics.
Clearly, Google is not unique in its growth prospects:
EPS growth Next 5 Years
Sales Growth Past 5 Years
Focus Media Holding
These stocks also trade at lower valuations:
Focus Media Holdings
Normally there are greater risks manifest in buying value stocks over growth stocks. They tend to be more volatile, have higher debt burdens, and have a greater sensitivity to market swings (higher beta). DECK certainly has seen huge swings in price and is very volatile. However, these stocks have debt-to-equity ratio under one, a rough rule of thumb for stable financing. Aside from DECK, none of these stocks really has excessive volatility or has seen an overall horrible price decline in the last year:
All in all, Coinstar and Discovery Communications stocks are equal or better alternatives to Google. As profit-maximizing investors, you should consider shares of CSTR and DISCA before you would think of buying shares in a glamor stock. The remaining stocks on this list should be in the running with GOOG shares because they offer a deeper discount with greater risk.
Many investors will not heed this analysis because they are not investing to earn returns on their capital. Many investors - whether they admit it or not - select securities for other reasons. They value what economists call psychic or non-monetary rewards for their economic activities. Though I sympathize with this, I recommend the following coping mechanisms to help treat these investing disorders:
Psychic Reward 1: Bragging Rights
These alternative stocks will not impress your friends like the company that is pioneering self-driving cars. Google is way cooler than these other stocks. Fortunately, since your investments are not public information, you can tell your friends, "Google stock is for the general public and sophisticated investors know how to find real bargains." If you like being aloof say, "I have my investment advisor handle those decisions so I can focus on what's really important." Finally, you could just lie and say that you own the stock. It's none of their business anyway.
Psychic Reward 2: Being Part of the Future
The cult of Google seems to confuse this large-cap stock with "the future." Your ownership of the stock has literally nothing to do with what the company does since Larry Page, Sergey Brin, and Eric Schmidt control 66% of existing voting rights based on their ownership of Class B shares with enhanced voting rights. Moreover, as a consumer you will have the same opportunity to buy Google products as everyone else, regardless of whether you buy shares. You can also read about the company in the news media just like everyone else. You are no more enlightened or part of humanity's progress by owning the stock. If you want to really stay on top of cool science fiction and technology trends, watch videos on Ted.com or watch episodes of Star Trek.
The point of investing is to turn your investment capital into more investment capital at the least risk. This has nothing to do with cool headlines, cool stocks or cool industries. Check out stock that trades at cheaper valuations with higher growth trajectories regardless of their psychic rewards. When you cash in your investment portfolio to purchase goods and services, no merchant will care which stocks you owned or how cool they were. They will only care about how much money you have to pay, not where it came from.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.