Shares of Priceline Group Inc (NASDAQ:PCLN) have been on fire — not just in 2017, but over the last several years. In this year alone, PCLN stock is up nearly 40%. Over the past 12 months, it’s up 44% and more than 200% over the past five years.
Given that kind of performance, why should investors take a pass ahead of Priceline earnings? Because it may have rallied too far, too fast. Its fundamentals and technicals are questionable and we don’t like to buy into questionable situations. That goes even for companies with an excellent business.
What’s So Great About Priceline?
First, the underlying business for Priceline is going well. Economies around the world are strengthening, particularly in the U.S. and Europe. That bodes well for travel companies like Priceline and Expedia Inc (NASDAQ:EXPE).
Analysts expect sales to grow about 15.5% annually for the next two years. Forecasts call for 13% earnings growth in 2017 and 16.5% growth in 2018. Priceline’s 2013 acquisition of Kayak for just $1.8 billion is helping to drive sustained growth by taking market share. At the same time, secular trends are paving a smooth and long runway for the sector. Other acquisitions, like OpenTable, have also been a factor in PCLN’s growth.
Priceline’s recent purchase of Momondo for $550 million should help as well. “Momondo and Cheapflights are premium brands that have garnered a loyal customer base throughout key markets in Europe,” Priceline CEO and President Glenn Fogel said just last week after closing the deal.
Strong earnings and sales growth, a strong underlying market and key acquisitions. What’s not to like about Priceline?
The Issues for PCLN Stock
Over the last 10 years, PCLN stock has rarely topped a price-to-earnings ratio of 45. When it does, the P/E ratio isn’t able to sustain those levels. Also, its price-to-sales figure usually hovers around 7x. Now it’s at 9.1x. Over the last decade, this figure has climbed north of 8.5x four other times. All four times it corrected lower.
Remember, Priceline is a great business — one that is certainly hard to doubt given its years of success. But PCLN stock has a history of failing to garner a valuation much higher than current levels. History suggests it won’t.
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The technical story isn’t too peachy either. For starters, the Relative Strength Index (orange circle up top) shows PCLN stock is in an overbought condition. This happens when the RSI measure climbs above 70. Over the past 20 months, PCLN stock was careful not to become too overbought, (with the exception of 2017). Although it may complicate the chart, I’ve added green vertical bars to show the reaction to each time Priceline has had an RSI reading near or above 70.
Additionally, momentum is waning, as measured by the MACD (below in the purple circle). Each reading above 40 has ultimately fallen. Waning momentum along with an overbought condition is good news for bears.
However, the trend is one of the strongest of any stock I can recall. The black trend line has been support numerous times over the past year and a half. Despite how it may feel in the short term, a pullback to this trend line would be incredibly bullish. A fall from $2,032 to $1,900 seems like a lot, but would only represent a decline of about 6.5%.
I would also looks for prior resistance (blue line) to act as support for PCLN stock. While more upside could exist, I wouldn’t get long now expecting much more in the short term.
The Bottom Line
Betting against strong stocks based on valuation is a tough business. As investors gain more and more confidence in PCLN, Microsoft Corporation (NASDAQ:MSFT) or Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), who am I to say it’s overvalued? These are mega-companies and the opinion of one person is not going to move the stock.
In the case of Priceline earnings, it very well may react positively when it reports on Tuesday evening. That doesn’t mean we should chase it though, as there are too many concerns sticking around.
Last quarter, we also deemed PCLN stock too hot to handle ahead of earnings. Shares quickly pulled back after the report. Let’s look for the same thing this time before getting long.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
