Today I'm pulling the trigger and investing the remaining cash in my Strategy Lab growth portfolio.
When we started Strategy Lab in mid-September, I decided to keep some powder dry and put only put about 80 per cent of the imaginary $50,000 I was given into the market. (My index investor and dividend investor colleagues are both fully invested, while my value investor colleague, Norm Rothery, left himself with an even bigger cash cushion than I did.)
I'm glad I have the cash on hand, because a long-term investor's greatest strength is his ability to turn the short-term ups and downs of Wall Street to his advantage. Right now, I believe there's an opportunity in the shares of online travel agent Priceline.com Inc.
The opportunity arises, at least in part, from the problems facing the Italian economy. Priceline generates a lot of its growth from Europe, and the depressing Italian headlines are a key factor behind the 5 per cent decline in the company's shares on Monday.
It's always nice to do your buying when shares go on sale for reasons that are neither specific to the business you are buying nor long-term issues. In this case, the bleak outlook for the European economy is dragging down the shares of Priceline and other travel-related companies for an entirely understandable reason – tourism tends to tail off during a downturn.
But downturns don't last forever. Over the long term I'm about as worried about the travel industry collapsing as I am concerned that the Mayans were right, and come Dec. 21 we're all goners.
I've got enough cash in the portfolio to buy 14 shares of Priceline.com, which is exactly what I'm doing in the wake of Monday's selloff. I do so knowing that the stock will continue to be volatile, and there are no guarantees I'll be right in making this call.
Still, I believe there's a lot to like about Priceline, beginning with the fact that it is the largest online travel agent on the planet. The company is significantly larger than its closest competitor, Expedia; it's also much more profitable, and growing significantly faster.
I think Priceline has a lot of growth left. A report from Piper Jaffray earlier this year pegged the company's market share in Europe at just 6 per cent. That level is three times higher than Expedia, the No. 2 player, and six times higher than Orbitz.
Ponder those figures carefully: This is an industry where a clear market leader is established, yet the total market share of all online travel agents combined is barely nudging the double digits. The numbers suggest the industry has a lot of room to expand – and that Priceline is the company best positioned to take advantage of the growth.
It is best known in the United States for its successful "name your own price" model. It buys wholesale hotel space and resells it in an auction-like process.
Yet about 85 per cent of Priceline's profits come from Booking.com, a business it acquired in 2005, and one that is still unfamiliar to many North American travellers. It follows a more traditional agency model, where hotels list their rooms at whatever prices they want, and Booking.com takes a small commission on sales.
The moat around the business is its enormous reach. Last quarter, Booking.com business reported 245,000 hotel properties in its network, up a whopping 44 per cent from a year earlier, while its hotel bookings grew 36 per cent.
Bookings.com has become the clear market leader in the business, which affords Priceline the ability to invest in marketing and scale up its product to continue outgrowing its competitors for years to come.
According to S&P Capital IQ estimates, Priceline will bring in earnings of $37.67 (U.S.) a share next year, putting the stock's price-to-earnings ratio just north of 17.
That looks very attractive compared to stable but much slower growing businesses such as McDonald's (forward P/E of 15.5) and Coca-Cola (forward P/E of 17.2).
By 2016, analysts expect Priceline to pull in almost $58 in earnings per share.
If so, we'll likely be looking at a stock price approaching $900. If the economy doesn't get in the way, and growth remains strong, breaching $1,000 per share seems very likely.
There is real money to be made by investing in companies that are leading important, disruptive trends through the use of technology – companies that will disrupt the market more over 10 years than the market seems to be pricing in. Priceline fits the bill.