Google has been living through many ups and downs in recent months, as has the rest of the stock market obviously. And while I have seen many reports about how in these times, investing by looking at P/E earnings might be a mistake, but without a better reference, that is still what I’m looking for. And since Google released its latest quarterly earnings report last week, it is a good time to look at the possibilities for Google.

-Earnings per share (EPS) came in at 4.92$/share excluding special items. If you put this as a yearly figure (which I would think is conservative since the Thanksgiving/Christmas season would be the highest earning quarter in terms of advertising), you get about 20$ of EPS. I think a P/E between 25 and 30 is justified for Google given its high growth (more on that later) which comes up to a 500-600$ target for Google….

-I think Google can maintain the growth for a while still because of 2 main reasons: extensive advertising in its current products and new products

-Firstly, I think Google has been able to open up a few new channels of advertisements such as the new possibility of ads on google maps (which has great potential in my opinion), unblocking of gambling ads in their search engine for certain products such as Britain (where it is legal)

-They also have quite a few products that have been pretty much ad-free while they are gaining market share such as Google Finance but could gain significant earning power when Google decides the time is right. Google also has the potential to gain in the medium future from new activities such as Android, Google’s mobile phone play.

-Because of its dominance in the search market (62.9% in the US and still growing), Google has more room to increase ads without having a user backlash than many competitors.

-And finally, I see as a major positive the fact that Google has become a lot more diverisified with this quarter being the first one ever with more than half of advertising revenues coming from outside of the US.

I’ve received a few questions wondering about what kind of investments have been performing well in this very tough environment because let’s face it, a lot of investors think we are far from out of this situation and that an important recession will occur and probably has already started. While personally, I’m far from convinced of that situation, I have been looking through the universe of possible investments to see what kind of investments were performing well this year. No doubt, they are rare and tough to find.

Obviously, in a tough environment like the current one, it is difficult to escape going into bonds. With gold, government bonds are the safest investments and generally go up in such situations. Normally, that is true of all government bonds (almost)… but given the many credit concerns, many government bonds have been suffering, even in high quality countries like Germany. So it is safer to stay in US Government bonds, that are still seen as the safest investment in the world.

As you will see in the coming months, I am a big fan of ETF’s as forms of investments for many reasons (liquidity, cost, etc). And that is even more true for bonds. In such markets, million dollar investments are more common and so if you are planning on investing a few thousands out of your RRSP or your 401K, you will be paying a lot to get into those bonds. Not necessarily in terms of commissions but just in terms of the price that you will be able to get.

Because of that, I recommend that you invest in TLT, an ETF managed by Ishares, that tracks US bonds of 20+ years to maturity. It does pay coupons as would a bond and will give you an easy way to get in a position to profit from such uncertainty. To give an example, TLT has a 5.17% return so far this year. Not too bad when you compare it with the -35.55% return on the S&P 500.

So when you read that you should be diversified and hold a certain portion of fixed income in your portfolio, keep in mind that sometimes, equity positions should really be considered fixed income, such as this one (same as holding a GLD ETF would be more of a commodity position than equity).

With everything that has been going on in the past few months, once of most discussed subjects is the use of mark-to-market accounting for illiquid assets. Many of these illiquid assets are mortage backed securities (MBS) as well as other asset backed securities (ABS). While some of these are truly risky because of potential bankruptcies, others are considered very safe because they are senior. By senior, I mean that an important portion of the mortgages in an MBS would have to default in order to have any kind of impact on the investors of these senior notes.

The problem however is that like many other investments, these notes are something that many financial firms are trying to get rid of because of the stigma associated with it, often without much regards to the price. Many of the big financials wanted to sell these assets to avoid any possible write-downs. These write-downs would not happen because of a deterioration of the loans but rather because of declining prices.

I have seen a lot of research suggesting that these prices are now underpriced and many of the biggest investors have been buying such assets (biggest one is probably Blackrock). The problem is that for small investors, getting involved in such a market is nearly impossible. But there exists a few indirect plays and one of them I have been looking for is VVR, Van Kampen Senior Income Trust, which is down 53.02% in the past year. Here is the official description of what they do: “The Trust invests primarily in a portfolio of interests in floating or variable-rate senior loans to corporations, partnerships and other entities, which operate in a variety of industries and geographical regions. It invests in various industries, including aerospace/defense, automotive, broadcasting (cable), printing and publishing, entertainment and leisure, healthcare, buildings and real estate, electronics, personal and miscellaneous services, finance, paper and forest products, and beverage, food and tobacco”

So I would consider that for now, this could be a good short to medium term investment as these illiquid assets are bought back by the US Treasury and as many other investors (often vulture funds) get involved in this market. The fund manager estimates the NAV to be 4.49$. The security also currently offers a 12.43% dividend yield.. not bad hey?