Revisiting Google and Microsoft

On December 21, the Turnkey Analyst had an excellent post on Google:

http://blog.alphaarchitect.com/2011/12/turnkey-research-note-google-inc-nmsgoog/

Here's a quote from the analysis:
Recently, however, over the past year, the company has shown lower asset efficiency, with lower asset turnover and a declining return on assets.  These factors combined with a rapidly growing asset base, might suggest an area for further analytical review in the context of the ongoing durability of GOOG’s economic moat.  Additionally, the company’s equity looks somewhat expensive versus our screening universe.  Overall, we have some reservations about investing at GOOG today.

Looks like the assessment for Google was a good forecast of things to come. Ouch.

http://www.forbes.com/sites/ericsavitz/2012/01/19/google-what-the-heck-happened-to-them-in-q4/

January 13, the Turnkey Analyst came out with an assessment of Microsoft:

http://blog.alphaarchitect.com/2012/01/turnkey-research-note-microsoft-corporation-nmsmsft/
While in the longer run, MSFT may face significant competitive pressures, it is unlikely to be dislodged from its strong defensible position in a dramatic way any time soon.  There are no obvious red flags from any of our short screens, and the company is hugely profitable and stable, so there is a low risk of financial distress.  The stock looks cheap here, and its strong magic score suggests that you are not overpaying for this very high quality business.  If you are looking for a safe bet in a high quality company in the technology space, MSFT would appear to fit the bill.

Just recently, MSFT came out with results that beat the Street.

http://www.bloomberg.com/news/2012-01-19/microsoft-profit-tops-estimates-on-xbox-demand.html

So what's the lesson here?

A. Turnkey Analyst analysis is always correct?

B. Google is a terrible company and Microsoft is a great company?

C. Investors should jointly assess quality and price when making their investment decisions?

Answer: C.

A is certainly not correct (http://blog.alphaarchitect.com/2011/09/tka-research-note-apple-inc-nmsaapl/). D'oh.

B is not right, either. Without Google, my life would not exist! I'd have to do traditional things like manual labor, playing outside, and write letters to people with a pen and paper--God forbid! And Microsoft isn't the king of all things good--last night I was programming in VBA and got my favorite excel error "Sorry, you cannot save the file, XML error. blah blah blah"

From a quantitative perspective, MSFT and GOOG are both very high quality companies. However, from a price perspective, GOOG is much (or should I say, "was") more expensive than MSFT. The problem with paying high prices for quality is that the high quality must persist or the Street will teach you a lesson. Meanwhile, buying high quality at a lower relative price builds in a margin of safety, and if results do better than expected, the low-price stock will typically have a huge rally.