A gain of 13.52% in 2019 for shares of Google parent company Alphabet Inc. (GOOGL) tells a story of a stock gaining alongside a large amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved. Over time, we've learned how stocks with a history of strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class.
The main criteria we look for when betting on upside in a stock is a history of strong fundamentals, strong technicals and big potential buying in the shares. I'll go into the fundamental picture in a moment, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall.
For the second half of 2018, Alphabet stock was in a steady downtrend. Coming out of the meltdown in the market in late 2018, shares have retraced with unusual buy signals. In our view, pullbacks = opportunities, especially pullbacks we see as mechanical in nature.
For Mapsignals, when we look for an entry in a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Alphabet stock has made over the past year. Clearly, there was a lot of red in the back half of 2018.
Alphabet is a popular FANG stock, and its shares fell alongside all stocks toward the end of last year. No stocks were immune to the massive sell-off in the market. The message is clear – shares move based on supply and demand. What is really catching our eye now is the recent UI buying:
In 2019, Alphabet stock has logged six unusually high-volume days, indicative of buying in the shares starting on Jan. 31, 2019 (see chart above). This points to Alphabet gaining in an unusual way, which suggests that demand for the stock is increasing.
If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas in which Alphabet stock has grabbed our attention:
Now, we take it a step further and score the best stocks showing unusual trading activity. These are the outliers. Below you can see the historical times since 2013 when Alphabet made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the big run-up over the past five years. That's exactly what our process is designed to do. We'd even venture to call this stock an outlier:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Alphabet's latest earnings report showed year-over-year (YoY) growth:
- Q4 2018 YoY revenue growth rate: +22%
- Q4 2018 YoY operating income growth rate: +7%
Alphabet stock is breaking out with other FANG names. We believe that the current stock price is in position for further upside. The narrative for Alphabet is that the company dominates search and the ad space. We are always on the lookout for great companies showing usual trading activity in their shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Alphabet stock represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds a long position in GOOGL at the time of publication.