I was looking at the chart of priceline.com Incorporated (NASDAQ/PCLN) the other day, as the stock surpassed the $1,000 level. But why would I consider paying so much for a stock when there are cheaper comparables in the same online travel space?
It’s true; there are less expensive online travel stocks than priceline.com. But when you are stock picking, you should look at the comparative valuation and growth metrics, and not simply stock prices. The problem is that many investors will tend to base their stock picking on the share price, but the reality is that determining which stock to buy is not like shopping for goods—you don’t always go for the lowest-priced item. It’s like the old adage, “You get what you pay for.” This also applies to stock picking.
Online travel provider priceline.com beat Google Inc. (NASDAQ/GOOG) to become the first company to break the $1,000-a-share barrier (excluding Berkshire Hathaway Inc.). This is an amazing accomplishment for a stock that debuted at $75.25 on March 31, 1999.
The key to priceline.com is that it was the first company to really drive the online travel segment and innovate its service offering along the way in spite of a growing number of competitors. This is why it is tops in the online travel sector.
Of course, there are competitors such as Expedia, Inc. (EXPE) that you could consider when stock picking, but the company is over seven-times smaller than priceline.com, based on market cap.
Based on comparative valuations, however, Expedia is more attractive, trading at 14.4X its 2014 earnings per share (EPS) and 1.6X its trailing sales versus priceline.com’s 20.24X 2014 EPS and 8.74X trailing sales.
When stock picking for the long term, try to always stick with the market leader; in this sector, that’s clearly priceline.com. However, for many, it may be more prudent to go with the number two player when stock picking in this case. Unless you want to spend $1,000 for a share of priceline.com, Expedia may be a better bet to consider when stock picking.
If you are looking at higher-risk small-cap stocks, take a look at Orbitz Worldwide, Inc. (NYSE/OWW) and Travelzoo Inc. (TZOO). Both of these companies are clearly cheaper, but there’s a reason why companies like priceline.com deserve the higher valuation.
Let’s take a look at the comparative revenue growth rate based on data from Thomson Financial:
As you can clearly see, priceline.com has the top revenue growth rates, which is why the stock market had rewarded this stock. It’s not always about the valuation when stock picking, but rather how fast the company is growing. For priceline.com, the growth is impressive, given the size of the company and its ability to maintain growth rates that are superior to its rivals and peer group.
Orbitz Worldwide and Travelzoo are cheap for a reason—just look at their estimated revenue growth rates, which are well below both priceline.com and Expedia.
So when considering what companies to buy within a sector when stock picking, remember it’s not always about the sticker price.