Like you, I hate losing money. So to protect and grow my capital along my investing journey, I like to find strong companies with rock-solid balance sheets that are attractively priced. Using that criteria, I believe Google
Strong company
You may know Google as an Internet search engine, but it's actually the most successful online ad agency today. Its search engine is the conduit for customers to bid to place advertisements in the form of links associated with keywords, and business is booming.
According to search data from comScore, the company controls the lion's share of the market. Among the big three search engines, Google had 62.6% of the market compared with 18.9% for Yahoo! and 12.7% for Microsoft's Bing.
As more people use Google to search for information, more customers want to advertise with Google. Over time, Google gathers more and more data and keeps its search engine relevant. That's a powerful feedback loop that keeps Google out in front of the competition.
Rock-solid balance sheet
As the leader, Google prints cash. Google produced $8.4 billion in free cash flow in 2009, ending the year with $24.5 billion in cash and short-term investments on its balance sheet and no debt. Wow, that's impressive.
To give you an idea of just how spectacular Google's balance sheet is, I ran a screen looking for companies with at least $10 billion of cash and less than $1 billion of debt. Only two non-financial companies have balance sheets in Google's rarified air: Apple
Attractive price
A great business does not necessarily make a great investment. If you pay too high a price, your chances of earning exceptional risk-adjusted returns goes down. Few would argue against General Electric's being a great business. But if you bought shares between 2000 and 2008, you're not a happy investor today.
So what we want to do is make sure we're getting an attractive free cash flow yield, which is free cash flow divided by market cap. That way we can use the 10-year treasury rate, currently 2.95%, as a benchmark for return and risk. Let's compare Google's yield with those of some other great companies.
|
Company |
FCF Yield |
|---|---|
|
|
5.8% |
|
Apple |
5.2% |
|
Qualcomm |
6.6% |
|
Amazon.com |
4.4% |
|
Netflix |
1.6% |
That's an impressive list of companies. Qualcomm and Google top the list as attractive from a free cash flow standpoint. With a 5.2% free cash flow yield, David Einhorn's recent purchase of Apple makes a little more sense now. Amazon's yield is a little low, in my opinion, and it seems investors are paying a very hefty price for shares of Netflix today.
The Foolish bottom line
Sometimes the market misprices great companies, giving investors the opportunity to earn great returns with less risk. Sure, the companies mentioned above have one or even two of the aforementioned qualities, but Google, in my opinion, has the complete package. Google is the online ad-placement leader, has plenty of growth ahead of it, a strong balance sheet, and trades at an attractive price. That gives me plenty of confidence that Google will be one of the best investments over the next 10 years.
