Google

How did two twenty-somethings from Stanford University (again!!) put the Internet advertising world on its ear and single-handedly reinvigorate the demand for Internet stocks? Having gone public a year ago at about $100 a share, it is now trading at close to $419 a share. This seven-year-old company has a revenue of $5.25 billion (Yup, this is "b" as in billion!!) and has a net income of $1.3 billion.

Google provides Web search engines and online advertising. Apparently, its algorithm (a procedure for solving a mathematical problem in a finite number of steps that frequently involves repetition of an operation, according to the Merriam-Webster dictionary) to search the Internet was more efficient than the other Web search engines out there.

When it started out, Google was asked to serve as Yahoo’s search engine. Today it has more revenue than Yahoo’s $4.83-billion annual turnover and with a market cap (stock price times number of shares outstanding) of about $125 billion, much more than Yahoo’s $59 billion. Because of Google’s injection of excitement to the stock market, tech stocks are now cautiously in vogue again. Even AOL, the Time Warner subsidiary, is now in play for either Microsoft or Yahoo to joint venture with or buy. While Silicon Valley used to create new companies for going public, Google has now become a potential exit strategy for most new tech companies.

To get some perspective, let’s compare Google with a few other tech stocks. Apple is a blue chip, whose iPod is now getting more market share in the PC arena, as iPod users are encouraged to buy Apple computers because of the coolness factor of the Apple designs. eBay continues to build its community of auctioneers and small business of collectors.

Typical of an Internet stock, the price to earnings multiple of Google is at an incredible 92.8 times; Apple and eBay have multiples of 46.2 times and 62.2 times, respectively. (GE and Exxon, both industrial giants, have 20 times and 11.3 times, respectively). As they did before, some Internet fund managers are arguing that their growth justifies the high valuations.

My Two Cents: Google is a speculative stock for a small portion of one’s portfolio; translation: five percent or less. (Okay, call me overly conservative!) It is what people call a momentum stock and will probably run out of steam in a year or less. I cannot believe you can grow your earnings more than six times year after year. (Then again, I may eat my words next year.) I would invest in Oxy instead. (See story below)

Armand Hammer

My wife gave me an early Christmas gift, the autobiography of Armand Hammer. She knows I am a voracious reader of the lives of successful men. (I can dream, can’t I?)

Mr. Hammer was born in May 1898 (just a few weeks before the Philippines was granted independence) and lived a full life until his passing in 1990. The autobiography described Mr. Hammer as a good if not a great man. (Then again, most autobiographies do show the plus side of any person writing it.)

There are two lessons I took away from the book: 1) Do the right thing and good things happen to you, and 2) It is never too late.

Do the right thing. When he was 23, he graduated as a med student and was considered for internship in a prestigious hospital. He was also running a successful pharmaceutical company while in medical school. Not able to attend classes, he hired a friend to take good notes and he studied for four to five hours a day after work.

An American of Russian descent, he was interested in Russian affairs and was so affected by news of a famine that he decided to help. Having been accepted to the internship, he decided instead to pack up and go to Russia to help. He bought from a surplus store a field hospital stocked with tents, camp beds, operating tables, surgical equipment and the works. He could afford it as he already had a net worth of more than a million dollars. (Imagine what that is in today’s money.)

While on the way to the famine site, he noticed the hunger among the people and also the tons of emeralds and semi-precious stones and tons of furs that sat idly. His inquiring mind learned that the Russians needed his help to trade the valuable goods for another valuable good, grain. Thus, one of the earliest counter-trade deals was completed. Mr. Hammer made commissions from the trade. This deal brought him to the attention of a new friend, Lenin, the founder of the new Russia after the Czars. Lenin offered him any concession that he wanted and offered him protection from both extortion and the bureaucracy. He was to profit from this friendship that led to other better things.

Mr. Hammer had no intention to profit from his trip to Russia, but his doing the right thing had brought a lot of good things to him.

It is never too late. Having retired in California at the age of 58, Mr. Hammer was introduced to Occidental Petroleum as an oil company with a potential as a tax shelter. He was offered half of the company for $120,000, but he declined as it was practically bankrupt. He offered though to co-invest in new wells. Over the next year, after several successful oil wells, Mr. Hammer started buying in the open market and became the largest stockholder and was elected president and CEO in 1957.

Fifty years later, Occidental Petroleum (Oxy) has a market cap of $33 billion with revenue of about $14 billion. Oxy has a P/E ratio of seven times earnings and an Enterprise Value to EBITDA multiple of 4.8 times. Given the recent run on oil prices, Oxy has a quarterly earnings growth rate of 130 percent. I believe this is a better buy than the Internet stocks mentioned above as the consumption demand for oil continues to increase.

At the age of 88, Mr. Hammer worked on bigger challenges: world peace and the cure for cancer. He did not stop until he had to.

By the way, Armand Hammer had nothing to do with the Arm and Hammer Baking Soda Company. In the book, he said he tried to buy the company but it was too expensive.

My Two Cents: For those of us who are nearing their 50s, it is never too late to start again. This applies to our country as well.

My Second Two Cents: The best of the holidays and the New Year to you as we share new hopes and dreams for our families and our country!