Could Google’s Share Price Signal a Real Economic Recovery?

How do you fancy paying US$1,011 for just one share?

If that’s your bag you may want to think about having a flutter on Google [NASDAQ: GOOG]. It closed at that price on Friday in the US. It was up 13.8% for the day.

Of course, at US$1,011 Google has a long way to go before it catches up with Warren Buffett’s Berkshire Hathaway [NYSE: BRK/A], which ended the day on Friday at US$175,400 per share.

But Google’s whopping share price is only part of the story. The most important part is the reason behind Google’s big price rise on Friday – it could mean the phoney economic recovery is stronger than we think…

Let’s make one thing clear. We’re still copping flak from folks who think we don’t get what’s going on in the big economic picture.

Well, we’ll say it again: we do get it. That’s why we call it a phoney recovery. But we also get it that regardless of what’s happening on the macro-economic and political front, stocks are still going up.

Just look at Google. Just look at the S&P/ASX 200. This year they are up 44.5% and 13.9% respectively.

You’ve got to ask yourself, do you want to sit and gloat and say things are a mess and not make money? Or do you want to acknowledge things are a mess and give yourself a chance to make a lot of cash on stocks?

You know our answer. What’s yours?

What Bad Economy?

One of the most economically sensitive sectors is the advertising sector. When the economy looks as though it may be going downhill, companies tend to cut back on advertising costs.

They do that because they figure if consumers are keeping their hands in their pockets there’s no point spending money on advertising. Now, you can argue the merit of that all you like, but it’s a fact.

Naturally, some businesses will maintain their ad spending. They see it as an opportunity to grab market share from the competition. But even so, for the advertising industry as a whole, a poor outlook means lower revenues and lower profits.

And that’s exactly where the economy is now, right? That’s the thing. If you look at Google’s revenue and profit numbers you’ll see that’s far from being the truth. That’s why the stock gained 13.8% on Friday to US$1,011.41.

In the September 2012 quarter (US companies report results quarterly, unlike Aussie companies who report results half-yearly) Google brought in revenue of US$13.3 billion and profit of US$2.2 billion.

In the just-released September 2013 quarter Google brought in US$14.9 billion in revenue and profit of US$3 billion.

In percentage terms that’s a revenue increase of 12% and a profit increase of 36%. So much for an economic slowdown. If we measure the strength of the economic outlook on the willingness of firms to spend on advertising, then this is a good sign.

Now, we know the September quarter doesn’t include most of the potential negative impact of the US government shutdown. By ‘negative impact’ we mean the possibility that companies were so worried about it that they pulled back on ad campaigns.

We won’t find out that until early next year when Google reports its December quarter numbers.

More Reason to Buy Stocks

But that’s for then. For now, regardless of gripes about the US budget and debt ceiling you can’t ignore the fact that the US S&P 500 is at a record high. The NASDAQ index is at its highest point since it crashed in 2000.

And the Aussie index is on the verge of surging towards our near-term target of 6,000 points by the end of this year.

On top of that, Google’s results confirm we were right to take a punt on economically sensitive stocks.

In November last year we tipped two Aussie media plays. They had both taken a beating during the previous three years. But we bet that most of the worst was over.

If we were wrong then it was a speculative play anyway. Speculators know that they shouldn’t invest more than they can afford to lose. But if it paid off then over time it could result in some pretty big gains.

It’s an idea we’ve stuck with over the past 11 months despite the negativity in the mainstream about the economic outlook. In fact, we believe in the story so much that in the current issue of Australian Small-Cap Investigator we’ve tipped another stock, only this one has a direct involvement in the advertising sector.

If things pan out as we expect then we’re looking at a big triple-digit percentage gain. But as we say, it’s a speculative punt. That’s true with all small-cap stocks. But with Google’s record results showing that advertisers are prepared to spend, we’re confident this is the right time to buy into this economically sensitive industry…

…And we’re equally confident that not only does this spell good news for advertisers, but it should spell good news for the rest of the Aussie stock market too.

If the news keeps going this way, more good news for stocks is on the way.


From the Port Phillip Publishing Library

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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