Barron’s is a highly prestigious provider of market-related news. Its calls often move stocks and always cause investors to rethink their positions. However, the most recent issue of Barron’sincluded a short case for Priceline.com Inc (NASDAQ:PCLN), which led me to wonder if it was a good or bad call?
A Look Back at Facebook
Back in September of last year, Barron’s published a story simply titled, “Facebook is Worth $15”. The cover story was very compelling, causing the stock to fall, and came at a point in time when everyone was bearish on the stock.
Follow the Leader
Now, fast-forward, my outlook for Facebook Inc (NASDAQ:FB) wasn’t based on the fact that I was bullish, but rather an “investment 101” rule that says to seek value when all panic and to be skeptical when all are bullish. In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I dig into market behavior and the psychology of investors to explain our tendencies. The point is that it’s quite normal for even the wisest and most experienced investors/analysts to be blinded by price, and to make decisions based on the performance of a stock, rather than fundamentals.
With Facebook Inc (NASDAQ:FB), Barron’s and almost all analysts were downgrading the stock daily as it was falling lower. I call this “following the leader,” as many of the large rating firms are connected to institutional investors, public companies, and or large hedge funds. As a result, analysts will often follow the direction of a stock in their calls, or the calls of competing analysts to ensure equality. It is very similar to the way in which large money management firms index invest to perform equal to the market, keeping clients happy. In my opinion, the Barron’s $15 call on Facebook Inc (NASDAQ:FB) was a clear “follow the leader” call, as the company bought into the overly pessimistic outlook and the downward trend of the stock.
Is Priceline a ‘Follow the Leader’ Call?
In this weekend’s cover story, calling for a profit squeeze in Priceline.com Inc (NASDAQ:PCLN), Barron’s argues that increased competition from old and new companies such as Google Inc (NASDAQ:GOOG) will force industry change. Not only is Barron’s making this call against Priceline but also Expedia Inc (NASDAQ:EXPE) and Orbitz Worldwide, Inc. (NYSE:OWW) And here’s the thing — this is a rare call against the leader, therefore I commend Barron’s on the call.
The timing of this Barron’s article is actually quite compelling, as it takes place at a time when optimism for the online travel industry is reaching an all-time high. After experiencing a horrible Q2 and Q3 of 2012, shares of Priceline.com Inc (NASDAQ:PCLN) have been rallying higher ever since, and saw gains of 7% last week alone. Furthermore, Expedia Inc (NASDAQ:EXPE) has doubled over the last year and Orbitz Worldwide, Inc. (NYSE:OWW) has been one of the best-performing stocks of 2013 with gains of 155%.
It’s safe to say that Barron’s bearish call against the online travel industry was not a follow the leader call. As a result, expect to see some controversy and backlash due to the firm downgrading the industry while it’s on such a hot streak. But here’s the thing — as a company that rates and provides outlooks on the market, Barron’s did its job, and investors should take notice.
Barron’s is right. The online travel industry has very few if any barriers to entry, new competition continues to pop up, and margins are incredibly high. Barron’s specifically mentions Google Inc (NASDAQ:GOOG), the largest online search company whose search results showcase prices, destination details and a “booking button.” These things could be crippling to Priceline, Expedia Inc (NASDAQ:EXPE), Orbitz Worldwide, Inc. (NYSE:OWW), and the others, and Priceline’s acquisition of Kayak should serve as proof that search is crucial, due to Kayak’s presence in travel search. As a result, Barron’s made a good call based on valuation, market conditions, and future threats on an industry that is highly exposed.
Conclusion
I’m not suggesting that Barron’s call is correct, or that margins will significantly decline for the world’s largest online travel company. However, one must acknowledge industry changes. Priceline.com Inc (NASDAQ:PCLN)’s price/sales of almost 7.00 and its operating margin of 35% are possible indications.
Like I said, I’m not saying to sell the stock or that it will fall, but I do view Barron’s article as a responsible way of assessing a stock. It is often difficult, as most analyst calls usually follow the trend of a stock, but retail investors should always try first to identify any potential negatives in a stock that is trending higher. If the upside exceeds the downside, then buy!
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook Inc (NASDAQ:FB) and Priceline.com Inc (NASDAQ:PCLN). The Motley Fool owns shares of Facebook and Priceline.com.
