George Leong | Oct 01, 2013 02:25AM ET
I was looking at the chart of priceline.com Incorporated (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. (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.
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:
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.
Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. The opinions in this e-newsletter are just that, opinions of the authors. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose.
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