Inside the Madness

The Curse of the High Flier Doesn’t Plague All Companies

From: James Cramer
Sent: Tuesday, November 08, 2011 10:36 AM
To: Nicole Urken
Subject: RE: Things i am considering

What did PCLN do versus the high man?

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Tuesday, November 08, 2011 10:42 AM
To: James Cramer
Subject: RE: Things i am considering

High man (UBS) for this quarter was for $9.62 EPS. PCLN reported $9.95 EPS. While 4Q guidance was a touch light vs consensus ($4.90-$5.00 vs $5.12 consensus), is seen as conservative.  Bookings up 56% YoY with generally positive European commentary also boosted name.

From: James Cramer
Sent: Tuesday, November 08, 2011 10:45 AM
To: Nicole Urken
RE: Things i am considering

I want to show how all of this works , Initially the stock was down hard, and then it rallied nicely in part because  the initial reaction did not take into account the high man thesis.

The curse of the high flier. To see the doom played out, you don’t have to look much beyond the share prices over the past couple of months for Netflix, OpenTable or Green Mountain Coffee. These high multiple stocks have been cut as their growth outlook has not kept pace with the elevated expectations their high multiples should command. Netflix? Subscriber debacle. OpenTable? Lower seated diner growth trends. Green Mountain? Patent issues (notably raised by David Einhorn) potentially halting penetration opportunities along with slowing consumption trends.

Because of these sharp share price declines, many investors have pegged all momentum stocks as fitting into the same danger zone. Yet when it comes to momentum, not all will fall from glory. Remember, momentum stocks are driven by earnings-per-share growing at a faster pace that expectations, with analysts having to play catch up. In Cramer's "Game Plan" segment last Friday, we noted that for Priceline to surge, it would have to beat not only consensus estimates but also the high-man expectations. What’s the high-man? That’s the KEY analyst for momentum stocks—the one that posts the highest estimate. In order to keep rising, a momentum stock must surpass that estimate in order to surge higher. The high-man for Priceline? UBS, which had an EPS target of $9.62, the highest among the analysts and well above consensus of $9.29. Priceline posted EPS of $9.95, which was well above that high bar.

Now, immediately after reporting on Monday night, Priceline was down, based on conservative guidance. After all, for high multiple stocks, you usually have to see a beat along with a guidance raise. But what investors didn’t initially take into account after the report, was the high-man factor. Because the high-man target was beaten, this outweighed the conservative guidance, which was also quelled by positive commentary on Europe trends. This allowed the stock to bounce back.

Not to mention, Priceline trades at just 18x forward earnings with a long-term growth rate over 30 percent... Cheap, particularly because for earnings growth of over 20 percent, you could pay up to 2x the growth rate (i.e. up to 40x). And the company is in great shape. With this name, you get the highest exposure to international (about 80 percent of operating profit) where growth will continue to outpace domestic growth driven by expansion in hotel inventory and low penetration for online travel in non-U.S. (~23 percent in Asia Pacific, ~34 percent in Europe, ~15 percent in Latin America vs. 55 percent in the U.S.). With third quarter bookings of $6.2bn (up 56 percent year-over-year), Priceline is, indeed, keeping up with high expectations. Amidst macro uncertainty, execution remains the name of the game, particularly among the high-fliers that are hit hard. PCLN has that—with management posting an impressive 50 percent gross profit compound annual revenue growth and 2,000 basis points operating margin expansion over the last five years. Importantly, there is much more room to grow.

The same is true of fellow high-flier Chipotle , a name levered to long-term growth because of its “Food with Integrity” program. The company delivered yet another earnings beat back in October with same-store sales up 11.3 percent, better than the 10 percent gain in the previous quarter… and they raised full-year guidance, forecasting same-store sales in the low double digits.  And in addition to sales accelerating, new store openings are accelerating too (this is key)—with the company expecting to roll out 155 to 165 new locations this year. This high growth name, with a large domestic opportunity to open up to 4,000 Mexican restaurants domestically from about 1,100 currently, combines execution with growth potential. And that doesn’t even include the call options on the new ShopHouse Asian concept opportunity and international growth. Unlike Priceline, though, I would wait for a pullback in Chipotle—particularly as it is trading at 40x earnings with a 20 percent long-term growth rate. When we next get a macro-related sell off, this is another great one that is well positioned for long-term growth.

The bottom line? Don’t punish all high fliers because of the missteps of some, particularly on a down day like today. Go back to the ones that have exceeded the lofty expectations. The ones that deserve their high multiples? Chipotle and Priceline.


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