Is Alphabet (GOOG) a Smart Long-term Buy?

Giverny Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. You should check out Giverny Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Giverny Capital highlighted a few stocks and Alphabet Inc. (NASDAQ:GOOG) is one of them. Alphabet is a technology company based in California. Year-to-date, Alphabet Inc. (NASDAQ:GOOG) stock gained 7.5% and on May 22nd it had a closing price of $1,410.42. Here is what Giverny Capital said:

“Our largest holding at inception is Alphabet, representing 7.7% of the portfolio. The Google search engine advertising business strikes us as possibly the best business model on the planet. Management has used Google’s enormous profit engine to reinvest in the research and development of artificial intelligence, autonomous driving, cloud computing and other platforms for the future.

For the decade ended 2019, Alphabet stock returned 16.9% per year, well ahead of the 13.5% return for the S&P 500. More importantly, Alphabet’s earnings per share compounded at 16.7% for the decade vs. 9.8% for the Index components. We like this math! On top of this, Alphabet has grown its spending on Research & Development much faster than revenue in recent years, pressuring its operating margin and earnings growth. For 2020, we think Alphabet’s R&D spend once again will grow faster than revenue and profit – though amid the current COVID-19 pandemic we hesitate to guess about this.

While it is possible that a portion of this R&D spend is being wasted on moonshots that will never come to fruition, we think it more likely that several of Google’s seedlings start generating profits this decade. We don’t believe Alphabet can grow EPS by nearly 17% per year for another decade, but we do think its earnings power is significantly in excess of its reported numbers. As its platform investments either start contributing to profit or stop consuming so much investment, Alphabet should be able to maintain a healthy growth rate for years. Perhaps one day Alphabet may find an opportunity to invest its $120 billion cash balance, nearly one-sixth of the market capitalization.”

Our calculations showed that Alphabet Inc. (NASDAQ:GOOG) is ranked #7 among the 30 most popular stocks among hedge funds. However, Alphabet Inc. (NASDAQ:GOOG) stock is a sell right now.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.