This 149-Bagger Hedge Fund Bought Google Inc. Should You?

Do you think its potential outweighs its risks?

Aug 29, 2014 at 7:45PM

Source: Google,

We should never blindly copy any investor's moves, no matter how famous, talented, or successful the investor. Still, it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

For example, a glance at the latest quarterly 13F filing of Appaloosa Management shows that in its last quarter it initiated a position in Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) -- enough to make the holding its fifth-largest.

Why pay attention to Appaloosa Management?
Appaloosa Management was founded by investing giant David Tepper and is known for investing in the debt of companies in distress. Tepper's investing history includes buying debt and stock in companies such as Enron and Worldcom. He made billions on bank stocks in 2009 after they had imploded and before they recovered. More recently, he invested in many housing-related companies. His company's reportable stock portfolio totaled $7.1 billion in value as of June 30.

Why should you look at Appaloosa Management's moves? Well, in a July 2013 letter to shareholders, Tepper noted that a $1 million investment in his hedge fund in 1993 would have grown to $149 million over the past 20 years. Investing in the S&P 500 instead would have left you with $5.3 million. Tepper's performance reflects an average annual net gain of 28% -- no small feat.

Why buy Google?
There are lots of reasons why Appaloosa, or anyone, might buy stock in Google. We can start with a look at its numbers. Its recent P/E ratio of about 30 may seem steep, but its forward-looking P/E is below 20. Both of those numbers are more than reasonable, given the company's brisk growth rate -- its stock has averaged annual gains of 27% over the past decade, and it's up 35% over the past year. Google's recent P/E, price-to-book value, price-to-sales, and price-to-cash-flow ratios are all below their five-year averages, too. It generates more than $10 billion per year in free cash flow, and revenue has more than doubled over the past four years, while earnings have gained more than 50%.

Google is known as the most dominant search engine, but it's much more than that. Its Chrome browser, for example, recently surpassed Microsoft's Internet Explorer in market share, and that growing prominence will help deliver more traffic inexpensively. Its Android mobile operating system powers hundreds of millions of devices, while Google Play facilitates the downloading of more than 1.5 billion games and apps each month. Google's Chromebooks are selling briskly, with sales expected to jump 79% to 5.2 million units this year. The company's portfolio of offerings also includes YouTube, Gmail, Google Glass, and Google Maps.

Put all those together, and it's easy to see how Google overtook Apple to claim the top spot in Millward Brown's annual ranking of the world's most valuable brands. Google is expanding in lots of exciting directions, too. For example, it aims to offer much faster broadband access with its Google Fiber, which threatens conventional cable companies. Further, its acquisition of Nest will boost its Internet of Things and home-automation offerings.

Keep in mind, too, the power and competitive advantage of Google's search dominance, as that grants the company nonstop exposure to consumers, making the rollout of new offerings easier.

Why sell Google?
One reason someone might consider selling Google is that its future isn't exactly certain. It's active in many rapidly changing fields, and it currently earns most of its revenue from advertising -- where rates are falling. That's not a death knell for Google, in part because of its increasing diversification and in part because it's making up for lower prices with higher volume.

Google is also not without significant competition. It may be threatening the businesses of many other companies, but it's also competing with Facebook (NASDAQ:FB) for advertising dollars. Facebook has been successful in mining user data in order to offer better targeting, for which it aims to charge higher prices. As if that's not enough, now is eying a bigger piece of the pie with its Amazon Sponsored Links. Google, meanwhile, is offering clients the ability to deeply analyze their marketing campaigns through its Shopping feature.

Another concern is falling profit margins, as gross, operating, and net margins are below where they were in much of the past decade. That's understandable, as Google expands into new directions (think Google Fiber and driverless cars), some of them more capital-intensive than its search and software offerings. Remember that companies can make up for low margins with great volume (think Wal-Mart, for example) and that lower margins for Google are still high margins. The company's recent net margin topped 20%.

You should never just blindly copy any other investor's moves, even if it's a successful hedge fund. Still, Appaloosa's purchase of Google might be your cue to look at it, and if you're not too risk-averse, you may like what you find.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of, Apple, Google (C shares), and Microsoft. The Motley Fool recommends, Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of, Apple, Facebook, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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