There’s no question that technology stocks have been a big leader in this year’s market rally. FANG — Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) — has been an important component. Investors became googly-eyed with GOOGL stock hitting $1,000 per share. For a few sessions in early June, they got their wish.
Fortunately, the ensuing pullback was anything but a blindside. On June 5, we wrote, “I hate to be Johnny Raincloud here, but … short-term traders … can try selling into the $1,000 hype.” Once shares broke down though, we said the $960 level was unlikely to hold. Instead, investors should look for a move down to $920 to $940. So now what?
Trading GOOGL Stock
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Looking at the charts, remember that GOOGL stock is up an astounding 33% over the past year. So despite its quick pullback, Alphabet could still have more downside.
Alphabet had been trading in a channel, (blue and black lines). With blue line resistance broken in May, we can look for that level to act as support around $920. That mark also served as the breakout level (green line), so it too could act as support. Additionally, the 100-day moving average is just below that area.
Simply put, $920 is important, as GOOGL stock has plenty of support there. Should that level fail though, look for previous channel support (the black line), to come into play once more. If that fails, then look for the 200-day moving average to come into play.
That’s the nice thing about bullishly trading stocks — they have layer after layer of support under them. Buying pullbacks of strong stocks into support hoping for a bounce is better than buying weak stocks into resistance hoping for a huge breakout.
The one concern with buying GOOGL stock is an easy one: A large scale correction. Should the market embark on a summer pullback, Alphabet and the rest of tech may get hit too.
The Good News for Alphabet
Alphabet is quite possibly the best FANG stock and easily one of the most attractive names in tech. Its brand strength is unquestionable. It owns the top two websites in the world (Google and YouTube).
Its management is among the best in the country. In a C-Suite littered with innovative individuals, it has also got discipline in CFO Ruth Porat. Porat, formerly with Morgan Stanley (NYSE:MS), came to Alphabet in May 2015. GOOGL stock is up a casual 70%-plus since then. Before then, it was flat for nearly a year.
She has tightened spending without restricting growth. She has provided the Street with the transparency it so desperately craved. Put simply, she was the one missing piece that was needed to unlock massive value in GOOGL stock. With better financial results and more insight into the business, investors are willing to pay a higher valuation for what was once a severely undervalued entity.
Speaking of Valuation
In March, I thought of Alphabet as my favorite FANG stock. Why? Along with the reasons above — great brand, excellent assets, superior management — the stock had a reasonable valuation. Unlike NFLX stock or AMZN stock, which have amazing businesses as well, I could actually fathom the valuation of Alphabet. Even at today’s levels, GOOGL stock trades at just 24x forward earnings.
Alphabet is growing earnings about 20% annually and is forecast to do so for the next five years. Analysts expect revenues to grow nearly 20% this year and 16.5% in 2018. Those numbers alone more than justify this valuation. But throw in Alphabet’s brand and assets and honestly, one could argue that the valuation is too low.
The point here is simple: We’d be lucky to get GOOGL stock on a deeper correction. If we can, the long-term business looks excellent and it’s worth investors’ dollars. Between $880 and $925, investors could initiate a position with plans (read: hopes) to buy more on a deeper pullback.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
