Edgemoor Investment Advisors recently published its Q4 2017 investor letter in which the investment management firm shared its detailed analysis of three securities including Alphabet Inc (NASDAQ:GOOG). Edgemoor believes that Alphabet is in a strong financial position and the company’s stock looks to be an attractive long-term investment. In this article, we’re going to take a look at Edgemoor’s analysis of Alphabet, which is the parent company of the world’s most popular internet search engine Google.
In the letter, Edgemoor said that Alphabet’s “revenue growth has averaged nearly 18% annually for the last three years and topped 24% year-over-year in the third quarter of 2017. This growth has been driven by substantial increases in both desktop and mobile advertising revenue, which together account for 87% of total company revenues.”
The investor believes that, in addition to the search engine, Alphabet’s software – Gmail, YouTube, Google Maps, Google Earth, and Google Play – are its very important assets.
In addition to search, the company’s array of internet services includes Gmail, YouTube, Google Maps, Google Earth, and Google Play, as well as the Chrome internet browser and the mobile Android operating system, which powers an estimated 75% of smartphones around the world. We believe these core assets provide a cohesive, end-to-end experience for consumers and, most importantly, drive internet advertisers to Google sites.
As the online advertising market has matured, advertisers have increasingly consolidated their spending around companies like Google with broad platforms, a vast user base, and unique assets. Consumers use Google products almost habitually (an estimated 90% of all mobile searches are performed on the Google platform), creating a switching cost based on familiarity and not just technology, which we believe will continue to protect the company’s online dominance and fuel growth.
Bloomua/Shutterstock.com
Further, Edgemoor likes Alphabet’s engagement in emerging technologies, including enterprise cloud services, artificial intelligence, and autonomous vehicles. The investment firm believes that the company’s investment in these technologies could drive growth for decades to come.
Talking about the company’s financial outlook, Edgemoor said:
Alphabet’s financial position is currently as strong as its market presence. The company should generate a record $107 billion of revenues in 2017, an increase of 19% over 2016. Alphabet also generates approximately $25 billion of free cash flow annually and held $100 billion of cash and marketable securities at September 30, 2017. We believe the balance sheet is solid, with just $4 billion of long-term debt and over $150 billion of total shareholder equity.
Here are the investor’s comments about Alphabet’s stock:
At 24 times estimated 2018 earnings, Alphabet stock trades at a premium to the S&P 500 average of 19 times, but it trades closer to that average when adjusted for the company’s large cash position. Furthermore, we believe the company’s higher than average growth prospects and strong competitive advantages justify a premium and make Alphabet stock an attractive long-term investment.
Alphabet Inc (NASDAQ:GOOG) is one of the most popular stocks among active manager and hedge funds. As of the end of December 2017, there were 124 hedge funds in Insider Monkey’s database with GOOG in their portfolio. Among those funds are Foxhaven Asset Management, Cat Rock Capital, and Thunderbird Partners.
Shares of Alphabet are up 8.77% since the beginning of this year. Whereas, the stock price has increased nearly 35% over the past 12 months. GOOG has a ‘Buy’ rating with a consensus average target price of $1,281, according to analysts polled by FactSet. On Wednesday, shares were trading at $1,138.17 in the pre-market trading session.
Meanwhile, Alphabet appears to be interested in disrupting the healthcare space. The tech giant, according to a new report by Ernst & Young, filed 186 healthcare patents between 2013 and 2017, Beckers Hospital Review reported.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
Free Report Reveals
Warren Buffet's Secret Recipe
Our Price: $199FREE
We may use your email to send marketing emails about our services. Click here to read our privacy policy.
