Google Recaptures 5th Spot On Most Valuable U.S. Companies List

Nearly two years ago I wrote about internet search giant Google (GOOG) seeing its stock price surpass $700 per share, and as a result, become the fifth most valuable U.S. company in terms of equity market value. Shortly thereafter the recession hit and Google shares tumbled with everything else. The stock is making a comeback though, after reporting strong third quarter earnings last night. Analysts are once again very bullish, boosting their target prices today.

With the stock up $21 today, Google has reached $550 per share and has now returned to fifth place on the most valuable company list, as you can see below.

topusfirms1009My main question has not really changed over the last two years. Does Google deserve to be number five, or will we look back five or ten years from now and realize that being a leader in internet search and advertising (while certainly an impressive feat) doesn’t really translate into a company being valued nearly the same as some of the others on this list.

Full Disclosure: Some Peridot clients have been long Google over the last two years, and some still own it, but I have been cutting back the positions as the stock’s forward P/E ratio has gotten back over 20 (currently about 22).

Earnings Will Likely Be Good, But How Will The Market React?

I have been prepared for a market correction for a while now, but we have yet to get one. The rally off of the March lows has reached +61% and the momentum continues to be strong. Will it continue even as companies report their third quarter earnings?

Nobody can know for sure, but over the years we have often seen a “buy on the rumor, sell on the news” mentality on Wall Street, especially during earnings season. Stocks ramp up heading into reporting season, only to fall after the news of solid results actually comes out. A similar phenomenon could certainly happen this quarter and as a result I will be carefully watching both what the numbers are, but also how the market reacts to them.

If stocks sell off even after companies post in-line or slightly better than expected earnings, such market action could be the first sign that a long overdue correction in stock prices is on the horizon. In fact, we might already be seeing this. This morning Johnson and Johnson reported earnings seven cents ahead of estimates but the stock is trading down in premarket trading. Will that be the start of a trend, or simply an aberration? We will have to wait and see.

Corporate Tax Breaks For Hiring Workers Won’t Work

There is chatter today that Congress is considering new tax breaks for corporations that hire unemployed workers. On the face of it this might seem like a good idea; incentivize companies to start hiring again. The only problem is that this is yet another example of a tax cut that won’t work. Proponents of tax cuts seem to think they can solve any problem in a capitalist economy, but that argument defies logic much of the time.

I have long argued that cutting the capital gains tax from 20% to 15% (as the Republican-led Congress did under President Bush) did nothing to boost demand for stock market related investments. The argument seemed to be that lower tax rates on profits would encourage more capital being allocated to the market, but that conclusion falsely assumed that the chief reason investors buy stocks is to save money on taxes.

In reality, we buy stocks if we think we can make a profit from doing so. Nobody was avoiding the stock market because of a 20% tax rate of capital gains (which, if anything, would encourage investing since it was lower than the income tax rate). They were avoiding the market because they didn’t think they could make good money in it. Cutting the tax rate on stock gains from 20% to 15% doesn’t make investing any more attractive to people because a 20% tax rate wasn’t what was holding them back to begin with.

The situation with any corporate tax break for hiring unemployed workers is essentially the same. Companies don’t hire workers based on tax rates, they hire them based on whether they need them in order to produce the amount of goods and services demanded by their customers. No competent CEO is going to hire a worker he or she doesn’t need simply to get a tax break. That would be like making a charitable donation simply to get the tax deduction (you wind up foolishly spending a dollar in order to save 30 cents).

Don’t get me wrong, I am all in favor of incentives (unfortunately, our country all too often needs to rely on them to get people to do productive things they otherwise wouldn’t), but we have to match up the incentive with the desired behavior. If we don’t, it’s just wasted time, money, and effort.

Comcast Making Another Bid For Mega Content Deal

You may remember a few years back when Comcast (CMCSA) made a bid for Disney (DIS) only to be turned down. Reports today have them once again making a play for a blockbuster media content deal. Initial reports out of a Hollywood web site last night had Comcast buying NBC Universal outright from General Electric (GE) for $35 billion but that story has conflicted with more reliable news sources today that have Comcast forming a joint venture with GE’s NBCU division. Comcast would contribute cash ($6-$7 billion is the rumored figure) and combine its own content assets with NBCU, spin the new company off, and retain 51% ownership (with GE having the other 49%).

As Peridot Capital clients own shares in both Comcast and GE, this deal is of great interest to me. I am not convinced Comcast making a huge push into content is the right move (cable service and content creation are quite different businesses) but I can see why Comcast CEO Brian Roberts might want to expand his net.

After all, they are already the largest cable operator and moves to boost that position will draw anti-trust concerns. Given that phone companies like Verizon are making a big play into cable, not to mention the typical satellite competition, owning solid content providers would make Comcast less concerned with how many people are using their pipes for cable access.

How does this play out for investors? Well, in the short term it will be seen as a negative for Comcast as people wonder if content is really where the company should be turning its focus, especially if it means spending billions of dollars in cash to do so. Longer term, as long as Comcast does not make any significant changes that threaten the profitability of NBCU, it could contribute a nice chunk of stable cash flow and diversify their business.

The impact on GE is harder to predict. On one hand, investors worried about GE’s balance sheet would be happy to see the company unload some of NBCU’s debt and also collect some cash in exchange for giving up 31% ownership (GE currently owns 80% of NBC, with Vivendi owning 20%). On the other hand, GE would become even more concentrated in cyclical and financial services business lines for its earnings. In a weak economic environment, the stable cash flow from NBCU has been helping, not hurting them.

Overall, I would be slightly more bullish on Comcast should this deal go through, mainly because I think CMSA stock would trade down more in the near term. Comcast is a stock I really like already, and although people will question a foray into media, I don’t think Comcast’s long term profitability will be negatively impacted by this deal. The uncertainty might just provide investors a nice entry point.

As for GE stock, I still think it represents a good value longer term (assuming you think the global economy will slowly improve) but I don’t think reducing its NBC stake would warrant as much of a change for the company relative to the impact on Comcast). I would not chase GE stock if it moved higher on this deal, but if both stocks dropped on the uncertainty surrounding it, both would be good values at the right price. That said, I would give the nod to Comcast for value investors looking to make an initial investment post-deal.

Full Disclosure: Peridot clients owned positions in both Comcast and GE at the time of writing, but positions may change at any time