Sometimes the best ideas come from the archives...
In my Stansberry's Investment Advisory newsletter, my team recommended shares of online travel giant Booking Holdings (BKNG) more than seven years ago in the February 2019 issue. Subscribers can access it here.
Booking is the market leader in online travel booking and has multiple independently operated brands. In addition to Booking.com, it owns Priceline.com, Agoda, Kayak, and OpenTable.
When we recommended the stock, we identified Booking as a highly scalable business. The more hotels and unique places it offers on its website, the more reason for travelers to use it and for new hotels to join its network. And long term, we were right about the business model's success...
As you can see from this 10-year stock chart, the stock has more than doubled from our entry price of $72.13:
But we were unlucky during the COVID-driven crash...
As with almost all of our recommendations, we established a stop loss – in this case, a 25% decline from our entry price, or $54.10. The stock hit this level on March 12, 2020, just a little more than a year after we recommended it.
This protected us from another 10% decline in the following days – the stock's closing low was $45.24 on March 23, 2020. But it also meant we missed the five-bagger that occurred off this low over the following five years.
In this case, the stop loss hurt us over the longer term. But the lesson here isn't to never use stop losses. They're important tools to protect you from a devastating loss. Rather, it's important to keep an open mind after you've been stopped out.
If whatever caused the stock to drop resolves itself and you still like the stock, you should look for a good opportunity to get back in.
(Note that if you're investing in a taxable account and want to capture the tax loss from the initial investment, you have to wait 30 days before rebuying the stock. And it any case, it's usually a good idea to give yourself a "cooling off" period. That lets whatever short-term issue is dragging down the stock play out.)
After peaking last July at $231.27, Booking fell 35% to a 52-week low around $150 in February. It has rallied a bit since then, closing yesterday at $181.12. But that's still 21.7% below last summer's peak.
I like nothing better than buying a great company after it has sold off. So let's take a look to see if Booking fits the bill today...
In our February 2019 Investment Advisory issue, Stansberry analyst Mike DiBiase did an excellent job describing Booking's background and why it's such a great business:
You can book air travel and rental cars, as well as make restaurant reservations, on its websites. But the accommodation business not only provides most of the company's revenues, it is also its growth engine. And the company expects that trend to continue. The growth is fueled by several powerful trends:
- Offline-to-online booking,
- Adoption of mobile devices, and
- Growth of travel in Asia Pacific.
These trends ensure the company has many more years of double-digit growth ahead of it.
These words are just as true today as they were in 2019.
Booking was also attractive because it was one of the most capital-efficient businesses we'd ever seen. As Mike explained:
Capital-efficient companies don't need to keep extending their hand asking for more capital. That's because their businesses generate loads of cash. They're able to use this cash to reward shareholders by paying dividends... or buying back their own stock, reducing the number of shares outstanding. They may also choose to pay down debt or simply keep the cash and use it to fund future growth. No matter what they choose, shareholders win.
That's why we love to invest in capital-efficient companies. They're able to grow their businesses with their own capital. That's a luxury most companies don't have. It gives them a huge advantage... And this advantage compounds over time.
When you invest in growing, capital-efficient companies and hold them for the long term, it doesn't really matter when you invest in them. Their excellent businesses and cash-generating power propel them through good times and bad.
Let's take a look at Booking's historical financials to see if it remains the capital-efficiency juggernaut we identified more than seven years ago...
Revenue and operating income grew strongly for 14 years, then crashed during the pandemic (though note that the company was still profitable in 2020). Both figures have recovered and grown strongly since then:
In the past 20 years, revenues are up 24 times, or 17.2% compounded annually. And operating income is up 152 times, or 28.6% annually. These are incredibly impressive numbers.
The cash-flow statement is equally remarkable. Booking has almost no capital expenditures ("capex"). And it has huge, growing free cash flow ("FCF") – up 92 times in the past 20 years, or 25.3% annually:
The company has always maintained a healthy balance sheet, with a net cash position in 13 out of the past 20 years:
Whenever Booking has decided to take on a bit of debt, it has mostly been driven by large share repurchases. These really ramped up in 2018 and have remained at $6 billion or more since then, with the exception of the pandemic years in 2020 and 2021:
As a result, its diluted share count has declined by 38.4% in the 11 years since it peaked in 2014. This means Booking has been reducing its share count by 4.3% annually on average, providing a nice tailwind to earnings per share ("EPS"):
In summary, Booking's financials are spectacular in every way and show no signs of weakening.
What about valuation? At yesterday's close of $181.12 per share, the company has a market capitalization of $143.4 billion. Adding $1.8 billion of net debt, its enterprise value is $145.2 billion.
Analysts expect EPS of $10.71 this year and $12.51 next year. So the stock is trading at 16.9 times this year's estimates and 14.5 times next year's.
That's a very attractive price, both in relation to the stock's history and the market. The S&P 500 Index trades at an average of just above 20 times. Booking is a far above-average company trading at a below-average multiple.
Over the past decade, Booking's stock has, on average, traded at 27.2 times forward price to earnings (P/E). And as you can see in this chart, it has never been lower than 14.5 times:
My Investment Advisory team and I will be taking a closer look at Booking. If we decide to recommend it, as always, subscribers will be the first to know.
Subscribers have access to our model portfolio of open recommendations, our full archive of issues, and our best new ideas each month. If you aren't already subscribed, you can do so by clicking right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.