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Motley Fool: Google this stock

Alphabet stock is shown on a screen at the Nasdaq MarketSite in New York on July 25, 2017. (Associated Press)
Alphabet stock is shown on a screen at the Nasdaq MarketSite in New York on July 25, 2017. (Associated Press)

If you’re searching for a strong and growing company with a stock that isn’t terribly overvalued right now, take a look at Google parent company Alphabet (Nasdaq: GOOG).

At its core, Alphabet is an advertising company. Through the first nine months of the year, 86 percent of the company’s revenue came from ads. It’s not hard to see why – Google has eight different products with more than 1 billion users each: Search, Maps, Gmail, Chrome, Android, YouTube, Google Drive and Google Play Store. All of the data collected by those services is infinitely valuable to advertisers.

The company also boasts significant non-ad businesses, such as Cloud and Google Play, and hardware products such as Google Home, Nest and the Pixel smartphone. And let’s not forget about Alphabet’s Other Bets – the moon-shot products that, if successful, could be huge boons for the company and its shareholders. These include Fiber high-speed internet, Verily life sciences products, Waymo self-driving vehicles, Calico human longevity solutions and Alphabet’s investment and venture-capital funding groups.

Alphabet shares were recently trading at a forward-looking price-to-earnings ratio of 22. While that may not sound like a screaming value play, consider Alphabet is sitting on a net cash position of $115 billion – equal to about one-sixth of its market value. (The Motley Fool owns shares of and has recommended Alphabet (A and C shares).)

Ask the Fool

Q. General Motors on Nov. 26 announced major layoffs, but its stock went up. Shouldn’t it have fallen? – H.L., Ann Arbor, Michigan

A. The shares popped as much as 7.8 percent that day and ended the trading day 4.8 percent higher. Stock price movements reflect investor sentiments about a company, so the fact that GM’s shares rose means that investors liked what they saw.

Layoffs – especially GM’s huge reduction of 15 percent of its salaried workforce – are bad news for workers, and often for communities too. But sometimes they can be good for companies, if payroll costs shrink and operations can still generate growing profits.

GM’s announcement was about more than layoffs and plant closings: It’s reorganizing product-development and engineering teams to reduce new-model development costs and bring new products to market more quickly. Over the next two years, GM will double the resources allocated to electric-vehicle and autonomous-driving development. It expects the restructuring to cost about $2 billion in cash (mostly for severance payments), and another billion or two in accounting costs, while yielding savings of about $6 billion a year by the end of 2020. That’s what made investors hopeful.

Q. Can I become a millionaire before retiring, and if so, how? – N.D., Brooklyn, New York

A. Start saving and investing in earnest now. If you invest $5,000 per year into the stock market and earn its historical average annual return of roughly 10 percent, you’ll be a millionaire in about 31 years. It will take about 23 years if you invest $15,000 annually and earn an average return of 8 percent. There’s no guaranteed return for stocks, but if you invest well and for a long time, you can amass a lot.

My dumbest investment

I’m starting to think that my investment in annuities was my dumbest investment, because it’s not insured by the FDIC and there’s a possible loss of principal. Should I take my money out? – D.D., Santa Rosa, California

The Fool responds: Annuities, where you pay now for income later, can be sound investments. But ideally, before buying one, you should learn a lot about them and keep certain cautions in mind. For starters, know that fixed annuities are generally better than indexed or variable annuities, as they promise set payments and can have lower fees. Indexed and variable annuities have more restrictive terms, with your possible gains sometimes capped.

You’re right that annuities aren’t insured like bank accounts. They’re contracts between you and, usually, an insurance company, so you should buy only from top-rated insurers. (If you look up “Comdex rankings” online, you’ll see scores between 1 and 100 for lots of insurers. Favor those with the highest scores.) You can spread your money between several annuities with different insurers to reduce risk.

Getting out of an annuity contract now might be costly, as you can face taxes due on gains, early-withdrawal tax penalties and/or “surrender” fees. Consult a financial planner or adviser to learn whether getting out of it seems a good move. You can find fee-only advisers through NAPFA.org.

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