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Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Priceline – Cheap At Over $1,000 A Share

January 16, 2015 | About:

Priceline – Ready to Rebound

Can a very high-priced share still be a bargain?

Online travel agency Priceline (PCLN) has been as reliable a grower as almost any stock out there. The firm’s balance sheet is solid. The stock registers in the top 1% of the 1700 companies Value Line's main research universe, in terms of long-term appreciation.

Priceline's blend of outstanding fundamentals plus a high beta allow for good entry and exit points for those wanting to play with these shares.

Priceline is a pure play on the overall worlwide increases in travel via direct, customer-initiated (internet) bookings. Their 10-year numbers reflect the very favorable trends.

Somewhat surprisingly, when considering all-time record results, PCLN had drifted down from a 2014 peak of $1,379 to under $1,000. The Jan. 16, 2015, low also established a new 52-week nadir, at $990.61.

It is easy to get a bit foggy when dealing with absolute share prices this high. Refocus on valuation by looking at Priceline’s historical P/Es at key ‘best buying opportunities".

Friday’s new low put PCLN at its best (lowest) valuation since 2010, just before a less than one-year, 224% run higher. The late 2011 sell-off preceded a quick rebound from $402 to $775. The 2012 pullback to $554 turned out to be a base for the run to almost $1,400.

The two periods when PCLN paused each came from somewhat overvalued territory, at about 25x and 26x what were then current year EPS.

Priceline’s present-day multiple is just 16.5x expected 2015 EPS of $61.05. It was greater than 17x at each of the two most recent previous launching points.

PCLN’s very steady, post-recession average valuation, has run 20.7x. A return to that level would support a 12-month goal price of $1,264.

Better than 25% upside, on a proven growth stock, at a below market valuation is a good thing. Deep-pocketed option writers can capture significant dollar premium by selling a PCLN Jan. 20, 2017, $1,000 put @ $150 per share.

I was able to do exactly that with the stock trading for $1,006.43.

The "if exercised" price drops all the way down to $850 ($1,000 strike price - $150 put premium). If the 2015 estimate proves accurate, the worst-case scenario would leave me forced to buy 100 PCLN at less than 14x earnings. Priceline has not changed hands as low as $850 for more than 18 months (see chart). It spent greater than 99% of the past 14 months above the $1,000 mark.

Selling this put was like “naming my own price” at $850 a share.

The best-case outcome merely requires PCLN to hold above that same $1,000 level on the option’s expiration date in January 2017. By 4 p.m., Priceline had closed at $1,008.22, already placing it above the minimum price needed two years out.

Maximum profit is capped at 100% of the premium collected. In this case, that is a hefty $1,499 after commission.

Please note that each contract sold represents a potential net purchase of $85,000 worth of shares. This option trade is not appropriate for small accounts.

Think dollars and not 100 shares. Think value instead of price. Even moderate-sized accounts can own Priceline. If you are reading this article, it is likely you could afford to own a few shares at a net cost of $1,000-5,000.

If PCLN moves up, as expected, you will still net 25% or better even if you only purchase 1 to 5 total shares.

Disclosure: Short 1 PCLN Jan. 2017, $1,000 put

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com

https://seekingalpha.com/account/research/subscribe?slug=arrow-loop-research

Visit Dr. Paul Price's Website


Rating: 4.0/5 (6 votes)

Voters:

Comments

rdj1234
Rdj1234 - 5 years ago    Report SPAM

Hi Dr. Price,

What do you think of buying leaps in a situation like this?

Thank You

Roger

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

Buying the LEAP calls out to 2017 is not cheap.

The $1000 strike had a bid - ask of $172.10 to $176.50 as of today's close.

Making up the stagger paid for time premium might consume a lot of the potential gain. Call buying could work but it is not my preferred play.

brandchr
Brandchr - 5 years ago    Report SPAM

Hi Roger,

if you prefer buying LEAP calls, be sure to own calls with delta > 90%! In this case a 1$ up (or down) would result to 0.9$ up/down in your call. It simulates the stock itself in a good way.

Christian

Harney246
Harney246 - 5 years ago    Report SPAM

Roger:

The concept in selling puts is achieving a lower cost basis if the stock is assigned to you. Dr. Paul's position is equvalent to owning 40 shares of PCLN. I am getting this number by using the delta value of the option sold.

Using the market implied volatility of the option, 28%; the market is forcasting a 68.2% probablity that the PCLN price will be between 620 and 1420

My counter to Dr. Paul's position is before earnings implied volaility is typically higher and he might have received a higher relative premium by waiting to make the sale in a relatively higher implied volatility period. According to Earnings Whipers, the unconfirmed earnings announcement date is 2/19/15. The trade-off is a month of time decay vs. potentially selling an option at a higher relative implied volatitlity price.

Currently, PCLN implied volatility is trading at around 42% of its 52 week range.... or close to the middle of its range. Closer to the earnings announcement, implied volatiity might be trading closer to 80% of its implied volatility range.

Regards,

Tom

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

Tom,

I care much more about where the stock is trading versus what it is truly worth than I do about implied volatilty. I want to sell puts when underlying issues look poised to go up, or at least not go down.

PCLN already closed above $1047 and the prices I quoted are no longer available even though IV might be higher.

Paul

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

PCLN closed around $1,100 today, less than one month from when I wrote about it at $997.

aporat
Aporat - 5 years ago    Report SPAM

Hi, thanks for pointing this out. I sold the put a few weeks ago and boy with PCLN at 1220 today this has been quite rewarding.

I have been following your put suggestions for quite some time (you posted on other forums previously) and I have to say that you seem to be able to spot a good opportunity based on a stock's historical perspective. I do most of my trading now through quantative algorthims (I find it gets rid of all emotional factors) and I'd love to be able to collaborate with you....

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