My InvestorPlace colleague Laura Hoy recently recommended investors consider Alphabet Inc (NASDAQ:GOOGL) after the FANG stock reports third quarter 2017 earnings because they’re likely to be disappointing, knocking GOOGL stock for a bit of a tumble.
I’m such a big fan of buying on the dips that in February 2016 I created a theoretical portfolio of 21 stocks using Google Finance, each with a $10,000 investment, all of which had lost 20% in a single week of trading. Except for seven losers, they’ve all recovered nicely and then some.
Take Trinity Industries Inc (NYSE:TRN) as an example.
It closed trading on Feb. 12, 2016 at $20.84. A week later, it finished at $15.97, down 23.4% over the intervening five days on weak guidance for fiscal 2016. I bought my theoretical shares Feb. 29 using the day’s high of $16.05 in an effort of fairness.
Fast forward almost 20 months and Trinity’s trading above $34, more than double where it was right after delivering bad news. That compares to a 35% gain for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same period.
Yes, it pays to buy on the dips, making Hoy’s suggestion timely and smart.
There’s Only One Problem
To buy on the dips there have to be some dips.
No, I’m not talking about a 20% dip like Trinity Industries’ shareholders experienced, but something more substantial than 1-2%, say 5%.
I’ve gone back over the past five years of GOOGL stock prices looking for weekly share price declines of 5% or more. Starting in October 2012, my search looked for weekly drops of $18 back then to about $50 today.
Here’s what I found:
Although there were a few weekly declines of 2%-3%, there were just nine dips of 5% or more, most recently a 5.7% down move the week of June 26 when it closed out the month at $929.68.
The average weekly drop was 6.3% with a single decline in 2012 (three months only), two in 2014, two in 2015, three in 2016, and just one through the first nine months of 2017.
As Google’s share price moves higher, a 5% decline becomes less and less plausible. However, if you’re going to pick the most likely month for this to happen, my research suggests October (three declines of 5% or more) or January (two 5% drops) are the likeliest months for it to happen.
Overall, GOOGL stock fell 5% in only nine weeks out of 312 over the past five years. That’s less than 3% of the time.
So, unless you feel like Alphabet’s earnings are going to fall off a log, I’m not sure how much you gain by waiting for the company to announce its earnings after the markets close on Oct. 26.
Bottom Line on GOOGL Stock
I’ve become less sure about GOOGL stock in recent months but not enough to swear off recommending investors buy it for their portfolios.
In late September I suggested that Alphabet needs to stop picking fights with other companies and focus on its core business. It remains to be seen if it can do that.
Hoy mentioned Waymo being ready to test in the Phoenix area; that’s good news for fans of the company’s self-driving cars. If successful, this could be a real boost to Alphabet’s other bets.
Given what Hoy has said about a dip in late October — there will be three days of trading after the earnings release — I believe if you want to buy GOOGL stock, you buy a half position now before earnings and the rest in early November after the dust has settled on its share price.
Although buying GOOGL stock on the dips isn’t easy, history suggests October is one of the likeliest times to take a nosedive.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.