There's nothing wrong with a little turbulence. Investors just need to know when it's time to relax and sit out the market's bumpy ways, and when it's better to begin angling toward an exit.
Every week, I single out a stock that has no place in your portfolio. I'll give you my reasons, but I'm no wet blanket -- I come right back with three stocks that I believe will generate better returns than the stock I'm throwing away. I'd call that a fair trade, especially in a market where too many investors are stuck on autopilot.
Who gets tossed out this week? Come on down, Priceline.com
All that glitters isn't Goldman
Clearly, there's only been one resilient stateside travel site: Priceline. It's a winning Motley Fool Stock Advisor recommendation, and one of the few companies that has declared a reverse stock split and been afforded the opportunity to gloat afterwards.
Priceline has earned those accolades, blowing past Wall Street expectations in each of the past 11 quarters. The company's latest quarter was another gem, with revenue and pro forma earnings up 21% and 34%, respectively.
However, there are more than a few reasons for me to worry:
- The global economic funk is impacting the world's demand for travel -- even "name your own price" discounted travel.
- Traditional travel portals are rolling out creative promotions like the elimination of booking fees or low-price guarantees. That should appeal to the dealsmiths who typically flock to Priceline. Clever and cutthroat? It could get scary.
- Analysts have underestimated Priceline before, but they're expecting the company to grow earnings by less than 4% this year.
- Priceline is now trading for more than 14 times this year's projected profits. That may not seem too expensive, but this sector finds Expedia
(NASDAQ:EXPE)trading for just 9 times this year's estimated earnings.
- The rumors of Google
(NASDAQ:GOOG)buying Expedia are stupid, but it's clear that Google wouldn't mind a bigger presence in the lucrative travel industry. Its own google.com/travel page redirects to a pitch for advertisers, pointing out a 2005 survey that showed 74% of consumers used a search engine to research or purchase online travel.
As is the case every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins:
(NASDAQ:CTRP): If Priceline's valuations appear steep, Ctrip won't win you over. China's leading portal trades around 30 times trailing earnings and 23 times Wall Street's target for 2010. The attraction to Ctrip is that China's market has more upside than Priceline's more global focus. Ctrip may be subjected to many of the same concerns as Priceline, but it isn't facing the kind of cutthroat competition in China that Priceline is here, which could alter Priceline's fortunes and competitive advantages by the time the economy turns around.
(NASDAQ:AMCN): Another Chinese play? Well, I was sorely tempted to go with eLong (NASDAQ:LONG), a smaller, slower version of Ctrip that is trading for just a little more than its $5.83 per ADS in cash and equivalents. However, I really like AirMedia as a Chinese air travel play. The company is the largest player in airport advertising, with contractual concession rights for its digital TV screens in 53 locations, including China's 30 largest airports. It also runs in-flight, ad-supported programs on several air carriers. AirMedia closed out 2008 in roaring fashion, with quarterly revenue and non-GAAP earnings climbing 148% and 50% respectively year over year. Analysts see earnings taking a hit this year, as the Chinese advertising market has been slammed, but bouncing back nicely in 2010. The stock is trading at just 8 times next year's projected net income.
(NASDAQ:TZOO): It may be heresy to suggest replacing Priceline with Travelzoo, but let's smoke out value. The company behind the "Top 20" weekly travel deals has been in the market's doghouse over the past couple of years, as foreign expansion eats through any stateside profitability. Fortunately, Travelzoo has grown its global list of opt-in subscribers to 15 million willing recipients. If the company isn't able to claw its way back to "growth stock darling" status, someone is bound to pay a premium to acquire it.
Other headlines from the weekly trash bin:
Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.
Priceline.com is a Motley Fool Stock Advisor pick. Ctrip.com is a Motley Fool Hidden Gems recommendation. Google is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletters today, free for 30 days.
Longtime Fool contributor Rick Munarriz has been booking travel online since the mid-1990s. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.