Buy Google at $500

Recently, Foolish colleague Tim Hanson asked whether it's worth buyingGoogle (Nasdaq: GOOG  ) at $500 a share. I'll go out on a limb and say yes, as long as you buy it right.

Explain, please
By "buy it right," I mean that owning shares of Google could be like playing kissy-face with a king cobra. Sure, you may plant a wet smacker on the snake with the cameras rolling, earning a stint on Animal Planet. But you could just as easily get a mouthful of venom and a trip to the morgue. This chart says it all (about Google's volatility, not the cobra's).

Consider, too, the multiples. Google today trades for roughly 48 times 2006 earnings and 36 times next year's income. By contrast, rival Microsoft (Nasdaq: MSFT  ) trades for 20 times its current fiscal year earnings and 17 times next year's projected profit.

And yet I can't bring myself to call Google expensive. Analysts have been so wrong so often when it comes to predictions for the stock that I wonder if it would look cheap if we actually knew what was coming.

What to do?
But of course, we don't. That's why we Fools have to tread carefully when buying a volatile stock such as Google. The safest approach may be to consult experts such as Bill Miller, who also happens to lead the Legg Mason Value Trust (FUND: LMVTX  ) mutual fund, which has beaten the S&P 500 for 15 years running. Value Trust has made Google a large part of its portfolio, with more than 4% of assets invested in the search giant.

In the most recent issue of Fortune, Miller, who bought Google at its IPO, explained why. He told the magazine that Google has years of 15% to 20% growth ahead of it because of increasing traffic, scale, and innovation. Perhaps he's right. It's at least worth noting that Yahoo! (Nasdaq: YHOO  ) trades for 59 times this year's earnings and 45 times next year's profit; a healthy premium to Google, the market leader, in both instances.

If you're thinking that's not exactly fair, I'm with you. But then again, what if both stocks are simply overpriced and Microsoft is the only real bargain? Not an easy question to answer, is it?

How to buy right
Of course it isn't, which is what brings me, once again, back to the idea of buying right. Few have done that better than Miller over the past 15 years. Buy his expertise via Value Trust, and you'll get Google and several other top-notch stocks to protect against losses in the event that he's wrong about the search king. Here's a list of the top five:

Company

% of Assets

AES

5.4%

Tyco International

5.2%

Qwest Communications (NYSE: Q  )

5.0%

Sprint Nextel (NYSE: S  )

4.9%

UnitedHealth (NYSE: UNH  )

4.6%

Source: Morningstar

Profit from the choices of champions
Google may or may not be a buy at $500. But I wouldn't hold it against you if you decide that it's worth that price or more. Just remember that you needn't take on additional risk to see your thesis through. Funds can be just as profitable as stocks -- and give you broad diversification, to boot. A $10,000 investment in Value Trust 10 years ago would be worth nearly $42,000 today, after all.

So, next time you're considering a highflier for your portfolio, consider owning the funds that own shares as part of a bigger portfolio and the records they've compiled. The few extra minutes you spend may help you to discover a manager who's already on his way to becoming the next Peter Lynch. In investing, it doesn't get much better than that.

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 26% vs. just 17% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios. Go ahead; it's free for 30 days and there's no obligation to buy.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Yahoo! and UnitedHealth are Motley Fool Stock Advisor picks. Microsoft, UnitedHealth, and Tyco are Motley Fool Inside Value selections. The Motley Fool's disclosure policy is always championship caliber.


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