Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Almost one year ago, I added the online travel giant Priceline.com Inc. to my Strategy Lab portfolio. At the time, the stock had already been a star performer in the S&P 500 for several years, and I bought my shares at about $627 (U.S.) each.
I predicted the shares were likely to blow through $1,000. The surprise was how quickly they did just that. As a result, my investment in Priceline has returned more than 80 per cent since December. With returns like this, shouldn't I be selling the stock?
Not a chance. Priceline is a classic example of what I look for in a long-term investment. Sure, the stock price has shot up. But the business continues to chug along like an accelerating locomotive, and I expect its growth to continue.
From the perspective of a long-term investor, nothing has really changed. The stock just isn't as absurdly undervalued as I felt that it was last year. There's plenty of fuel left in the tank, and I'm not about to disembark.
Trends take longer to play out than most investors realize, especially if they reflect a fundamental technological shift. As an early adopter, I had broadband Internet at home back in the late 1990s when I was an engineer working for Nortel Networks. I've used a smartphone since before anyone called them that a decade ago. As amazing as these technologies are, and as much as they've changed our lives, we're still only at the early stages of what is possible.
Most people, for instance, still book their travel offline. Ten years from now the opposite will be true, and the online tools available to travellers will be light years ahead of what we have today.
The technology is already here. But it takes a lot longer to change travellers' deep-rooted habits.
Priceline is in a great position to benefit from that shift. It's the biggest player in online travel and offers services spanning everything from flights and hotels to car rentals. The only real question is whether the stock – now well north of $1,000 a share – is valued fairly. I think it is.
To be sure, the stock has made record highs since reporting its latest quarterly results earlier this month. But it's still not terribly expensive in comparison to its earnings and growth rates. If you have the patience to invest for many years, I think you'll be rewarded with market-beating returns.
A look at consensus estimates shows analysts think Priceline will earn about $50 next year. That means Priceline trades at about 22 times forward earnings – a level somewhat above the broad market, but a valuation that doesn't bother me at all considering how quickly the company is expanding.
Look at the numbers: Gross profit increased by 42 per cent year over year. Net income was up 44 per cent. Total hotel night reservations were 36 per cent higher. The company's flagship brand, Booking.com, now has a database of 355,000 properties to offer customers, up 45 per cent year over year.
Analysts have consistently underestimated the pace at which Priceline will grow.
It wouldn't surprise me to see the company double its earnings per share between 2014 and 2018 – reaching that goal that would require less than 20 per cent annualized growth, which is far below the rates it's achieved in recent years. With respectable growth, I don't expect the price-to-earnings multiple to compress much. So I'm not expecting another 80 per cent gain in the next year, but I am expecting somewhere in the vicinity of 20 per cent per year for the next several years.
Yes, there will be volatility along the way. But that's part and parcel of being a growth investor.
If you think you can guess where stocks are going in the short term, I wish you good luck. You'll trade actively, hope for the best and probably suffer sub-par performance. But if you're like me, and don't think you're smart enough to predict short-term moves, take the easier route.
All you have to do is buy good quality stocks that you can tuck away for years. Forget about the volatility and enjoy the higher returns you're likely to achieve. When the long-term investment story doesn't look as interesting any more, that's when it is time to consider selling.
Chris Umiastowski