Stock Talk: Going Gaga for Google

In mid-August, there wasn’t much optimism in the US stock market. Fears of a credit crisis had resulted in a month of rather aggressive selling on Wall Street. From mid-July to mid-August, the Dow Jones Industrial Average () fell from more than 14,000 to a low near 12,500, or 10.7%. The NASDAQ Composite Index () fell 12.4% during that time.

Google shares got caught in the downdraft. The stock slipped more than 5% on July 20 after the company posted quarterly earnings that fell short of analyst estimates. For the second quarter, Google posted $3.56 a share, which was three cents worse than analyst estimates. Results trailed expectations due largely to an increase in costs associated with a bonus plan. Investors didn’t like the news and, from July 19 to August 16, the stock slid 12.4%.

Yet, as the broader market recovered, so did Google. The stock found a bottom two days before it was mentioned as a bounce-back stock in the August 20 installment of Stock Talk. The stock then enjoyed a two-month 30% advance.  In fact, all but one of the five bounce-back stocks performed well from August 20. Through October 19, Research in Motion () is up 46.2%, Apple Computer () has gained 39.4%, and Crocs () is up 18.2%. SanDisk () failed to join the rest, however. After a brief rally attempt in late-August, the stock fell victim to selling pressure and is down 21.9% since it was mentioned as a bounce-back stock on August 20.

Yet, while SanDisk failed to join the party, the other four performed well and lot of enthusiasm has now infested RIMM, APPL, and Google.  For example, after the release of its latest earnings report Monday afternoon, Apple was trading up to $187.25 and almost 10% above last Friday’s closing price. Meanwhile, Google was moving towards $654 a share on optimism the stock will benefit from further strength in the tech sector.

Analysts have turned very bullish on the stock as well. Late last week, four different securities firms raised their price targets on Google. The upgrades came on the heels of the company’s latest profit report. For the third quarter, Google posted $3.91 a share, which trounced analyst estimates of $3.26 a share. Revenues rose 57.3% and to a better-than-expected $4.23 billion. As shares of Google rallied on the news Friday, at least four firms raised the target to $800 a share, or 24% above Friday’s closing price. Credit Suisse and Goldman Sachs raised their targets to $800. American Technology Research raised their estimates to $815.00. Pacific Crest Securities’ now expects GOOG to reach $850 next year, or 30.7% above its current levels.

Call me a cynic, but where were these analysts and their price targets two months ago? Many work for the same firms that packaged subprime loans into collateralized debt obligations [CDOs] and other structured products, and then aggressively sold these mortgage backed securities to banks and hedge funds. By doing so, these firms played a big role in creating the problems in the credit markets to begin with. However, as the stress to the financial system mounted, firms and funds were forced to dump stocks across the board to solve liquidity needs. Google was not immune and suffered a 12.4% one-month decline, which mirrored the decline in the NASDAQ exactly. At that time, any analyst talking about $800 for a share of Google would have been laughed off the Street. They were selling, not buying. Now, however, after the stock’s two-month 30% rally, the sentiment has changed. Analysts are once again gaga over Google, which is probably a good sign that this “bounce-back” is now at risk of becoming a “pullback” stock.

Frederic Ruffy
Senior Writer
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