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Is Alphabet (GOOG) A Smart Long-Term Buy?

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·4 min read
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Madison Funds, an investment management firm, published its “Madison Investors Fund” third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 0.07% was recorded by the fund’s Class Y shares for the third quarter of 2021, with an 11.86% gain on a year-to-date basis, compared to the S&P 500 Index's gains of 0.58%, for the third quarter and 15.92% year-to-date (YTD). You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Madison Funds, in its Q3 2021 investor letter, mentioned Alphabet Inc. (NASDAQ: GOOG) and discussed its stance on the firm. Alphabet Inc. is a Mountain View, California-based multinational conglomerate company with a $1.9 trillion market capitalization. GOOG delivered a 63.17% return since the beginning of the year, while its 12-month returns are up by 79.41%. The stock closed at $2,876.44 per share on October 19, 2021.

Here is what Madison Funds has to say about Alphabet Inc. in its Q3 2021 investor letter:

"We are also enjoying results from portfolio companies that are benefitting in the current environment. Our largest holding, Alphabet, is experiencing vigorous growth as digital advertising is very strong in the current environment. Google Search and YouTube revenues were $50 billion last quarter, up 69% year-over-year, and up 25% compounded annually over the two-year period since to 2019. We believe these results are driven by robust consumer on-line activity and strong advertising spending from retailers, brand advertisers, travel and financial service companies, and media and entertainment companies. More advertisers are also shifting their spending from traditional TV to YouTube, and this trend should continue as people spend massive hours consuming content there. Last quarter Alphabet management said YouTube has 2 billion monthly active users consuming over a billion hours of video content every day. An equally striking statistic, according to Google Senior Vice President Phillip Schindler, is that 70% of YouTube’s reach was to an audience not reached by advertisers’ traditional TV media. YouTube’s advertising business is accelerating with scale, which adds diversity to Alphabet’s advertising revenue streams."

Pixabay/Public Domain

Based on our calculations, Alphabet Inc. (NASDAQ: GOOG) ranks 7th in our list of the 30 Most Popular Stocks Among Hedge Funds. GOOG was in 44 hedge fund portfolios at the end of the first half of 2021, compared to 45 funds in the previous quarter. Alphabet Inc. (NASDAQ: GOOG) delivered a 7.65% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest-growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.