High-Priced Stocks Worth Every Penny
Penny stocks are one way to double your money, but they're fraught with risk. However, there are equally shiny opportunities trading at the other end of the price spectrum, too. I call 'em "three-digit stocks," yet if they're anything like Berkshire Hathaway they can trade in the four-, five-, and six-digit range, too.
A penny stock might not be a good buy simply because it's cheap, and a three-digit stock shouldn't scare you away just because it carries a hefty price tag. Handsome is as handsome does. Let's check in with the Motley Fool CAPS community to see which of the high-priced stocks below earn the greatest confidence from our investor-intelligence database:
CAPS Rating (out of 5)
Return on Capital, TTM
|MercadoLibre (NAS: MELI)||***||$101.10||31.5%|
|Priceline.com (NAS: PCLN)||**||$632.76||31.2%|
Source: S&P CapitalIQ; Motley Fool CAPS.
But the fact that these stocks are high-priced is no reason to jump into them blindly, either. That's why we recommend you use this list as a launch pad for your own research and analysis.
Bidding up these shares
A better economy might justify MercadoLibre carrying a premium to its U.S. counterpart eBay (NAS: EBAY) , though a PE ratio three times larger than its rival might seem excessive. Even considering the improved growth prospects of the Brazilian online retailer, it still looks like the market may have bid it up too high. Yet Motley Fool blogger Chad Henage says focusing on those popular metrics would mean missing out on MercadoLibre's powerhouse ability to generate fistfuls of cash.
Looking at MercadoLibre: They have generated $0.21 of free cash flow for every $1 of assets in the last year. Just to give you context, eBay has generated $0.0845 per $1 of assets. Think about that for a minute, MercadoLibre is generating free cash flow at nearly 150% of the rate that eBay generates. This is a game-changing statistic for me.
And when you compare MercadoLibre's discount to that other Internet phenom, Amazon.com (NAS: AMZN) , you can see that its cash generation outstrips the e-tailer even more than it does eBay, and agree with Chad that even with its shares cresting the $100 mark, MercadoLibre's still not fully appreciated by investors.
Although MercadoLibre slid under analyst expectations this past quarter, analysts are still expecting e-commerce to grow at a 20% clip annually in Latin America. As the leading platform there, MercadoLibre should garner the lion's share of that increase.
Add MercadoLibre to your Watchlist and let us know in the comments section below or on the MercadoLibre CAPS page to discuss whether there's still room to bid this stock up even more.
Another prodigious generator of free cash flow is online travel agent Priceline.com, which reported fourth-quarter earnings that saw its stock take flight once again. Neither recessions, nor volcanos, and certainly not competitors have been able to keep this company grounded.
Like MercadoLibre, the OTA's success has been predicated on gobbling up international markets. While the U.S. saw gross bookings rise 16% last quarter, international bookings were up 66%, with profits in the segment up more than 51%. It continues to take share from Expedia (NAS: EXPE) and Orbitz Wordlwide, and doesn't fear the recent spinoff of TripAdvisor, which it views as a good source of referrals. Even Google positioning itself as a go-to source for travel information - and, possibly, bookings -- hasn't caused any turbulence for Priceline.
Yet we are seeing a sort of cumulative effect of all this competition. Priceline killed off the Negotiator for its domestic Name Your Own Price service that it's best known for here in the U.S. While not abandoning the service, it plans to highlight more-traditional booking services going forward, because most consumers didn't even realize it had such offerings. The discount end of the business has become so crowded these days that it's a dwindling (though currently still significant) part of its operations.
Highly rated CAPS All-Star member TMFDitty says when you look at its growth prospects and consider the amount of FCF it throws off, Priceline remains discounted.
You don't get a $600 stock price by underperforming. You get it by generating massive free cash flow, and growing that FCF strongly. At an EV/FCF of 23, Priceline remains cheap relative to 25% estimated growth.
Put Priceline.com in the Fool's free portfolio tracker to watch what lofty level it might next ascend to.
Count to 10
These three-digit stocks might be on their way to even higher valuations, but the smartphone revolution has the potential upset everyone's game plan. Check out The Motley Fool's free report "3 Hidden Winners of the iPhone, iPad, and Android Revolution" and get access to detailed analysis of these outsized opportunities -- it's completely free.
At the time this article was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of TripAdvisor, Berkshire Hathaway, Amazon.com, and Google.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Berkshire Hathaway, Mercadolibre, Google, and priceline.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.