April 17, 2008 11:31AM

Buy GOOG: Risky Business Is Sometimes a Good Trade

By Cody Willard

Trading into any company’s earnings report is always a tricky beast at best. Let’s say you have a good sense of what the company’s going to deliver fundamentally-speaking since you’ve been doing lots of homework and staying on top of its trends and newsflow (and perhaps even spoken to company soldiers on the ground for some anecdotal takes on how biz has been).

Even if you nail the fundamental analysis, then you’ve got to figure out what instruments (options — and then what time frame, what strike price, etc) would maximize your trading profits and minimize any trading losses. Why do you need worry about minimizing trading losses if you’ve got your fundamental analysis nailed?

That question leads us to the third thing you’ve got to get right when trading an earnings report — you’ve got to correctly analyze what’s currently priced into the stock. Just because a company’s report is “Better than consensus expectations”, doesn’t mean the stock will go up of course. Those “consensus expectations” come from some media company’s attempt at building their brand by taking the averages of a bunch of idiot sellside analysts who have no idea what being in business is actually like but who can work wonders on spreadsheets that their bosses and the company itself spoon feed them. In other words, “analyst expectations” aren’t very helpful when it comes to trying to game what’s priced into a stock ahead of an earnings report.

It’s called “sellside” for a reason, and that’s because they’re not the ones actually doing any buying of stocks. And of course it’s the guys who actually do make the decisions to buy and sell stocks that actually move stocks, so you’ve got to have a sense of what those guys are expecting in the report.

All this set up to tell you that I sure think Google’s a pretty good looking short term trade into tonight’s earnings report. Obviously, again, any trade into an earnings report is VERY RISKY.

But most long-only money managers I know are sick of their Google if they own it at all any more (They loved it when it was “safe” at $700 of course). Most long/short hedge fund managers aren’t trading the stock as they’ve been shaken out of it as it collapsed from $700 to $450 (they should have been watching Happy Hour when I was screaming at the TV that Google finally had to be sold back in November/December when it was at $700!). And the permabears? Man, those guys were short from $100 to $300 and then from $250 to $500 and then from $400 to $700, and they’re short again…Yup, now that the stock’s ALREADY fallen from $700 to $400, they’re all short again. Just ask ‘em and they’ll tell you it’s got fair value at $25 a share (remember when Barron’s quoted some idiot hedgies saying that back right after Google came public? 1x earnings, anybody?! Ha!)

And the media’s all bearish on the name these days too:

WSJ: Google’s earnings release today comes amid investor worries about the impact of the softening economy on its search ads.

TheStreet.com: Google’s Got Good Reason to Be Worried

Okay, finally, I want to be clear about the fact that I’m also emboldened in my liking-Goog-ahead-of-earnings call because I also think buying it here is a great long term investment. I’d probably use mostly common stock to build a big long term position back up and then use a little bit of money in some slightly in the money calls dated a month or two out, with full knowledge I might lose all of the capital in the calls if Google doesn’t deliver as I expect they will. Or if I’m wrong about what’s priced in. Or if I’m wrong about which calls are the right ones to use.

Did I mention trading into earnings isn’t for the faint of heart?