Many beginning investors make the mistake of thinking that whether a stock is cheap or expensive depends entirely on its share price. But just as low-priced penny stocks are the worst investments you can make, some stocks whose share prices are at nosebleed heights are actually good values. Below, we'll look at arguments about why Priceline Group (NASDAQ: PCLN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and AutoZone (NYSE: AZO) are actually good bargains despite their extremely high stock prices.
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Image source: Priceline Group.
This stock keeps traveling higher
Priceline Group has the third-highest stock price of any company listed on U.S. stock exchanges, currently trading in excess of $1,500 per share. Priceline's gains have come from modest beginnings, and the stock price was as low as $1 per share -- $6 after adjusting for a subsequent reverse split -- in the aftermath of the tech bust in 2003. Yet since then, Priceline has stood out with an impressive growth strategy that hinged largely on becoming a worldwide player in travel and beating its rivals to extend their scope beyond the lucrative U.S. market.
Even now, Priceline's growth prospects justify its price. Trading at nearly 40 times trailing earnings, most value investors would avoid the stock as being far too highly valued compared to the overall stock market. But most of those following the stock expect dramatic growth from Priceline, with projections for final figures of $65 per share in earnings for 2016 and more than $75 per share for 2017. That works out to a forward multiple of just 20. If you agree with many investors that Priceline will likely see revenue growth in the mid- to high-teens for the foreseeable future and even faster earnings gains, then a four-digit price tag for a share of Priceline looks a lot less expensive than it otherwise would.
Searching for the best high-priced stock
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Alphabet's shares have been in the high-triple digits for a long time, and the only reason why the company doesn't have a higher share price than Priceline is that the company behind the Google search engine did an unusual stock split in 2014 that created a new class of stock. Even with that move, share prices of $800 to $825 rank Alphabet among the most expensive on major U.S. exchanges.
Alphabet has impressive growth characteristics that belie its high current trailing earnings multiple of nearly 30. Alphabet's core business should generate about $35 per share in earnings for 2016 and more than $40 per share in 2017, especially if the recent introduction of the Google Pixel smartphone produces as much growth as some believe it will. Meanwhile, Alphabet believes its stock is a good value, having started a $7 billion buyback program that uses only a fraction of the free cash flow that the search giant produces each and every year. When you consider the longer-term, more ambitious projects that Alphabet has taken on, the stock's growth potential gets even larger despite its already-high share price.
Driving big share-price gains
The auto industry has been on fire in recent years, with record sales for U.S. automakers in 2015 and with 2016 having held up quite well rather than giving way to typical cyclical pressure. AutoZone has also found itself a big beneficiary of favorable industry conditions, and the stock has climbed to almost $800 per share. That's an impressive run for a stock that traded in single digits back in the early 1990s.
AutoZone's secular success has come from the fact that people are keeping their cars longer, and although increased reliability is one factor in that decision, the willingness to do ongoing repairs and maintenance also plays a key role. AutoZone has tapped into that market well, with a combination of new store expansion and strong same-store sales growth that has driven profits higher. Moreover, AutoZone is committed to buying back stock, which also boosts earnings per share. As a result, AutoZone already has a trailing earnings multiple of just 19, and expected double-digit growth in the years to come will reduce that figure even further.
Don't let high share prices scare you into thinking that a stock is fundamentally expensive. As the history of these three high-flyers shows, sometimes you'll find the best bargains among companies that have already seen big gains in the price of their stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Alphabet (C shares) and Priceline Group. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Priceline Group. The Motley Fool recommends AutoZone. The Motley Fool has a disclosure policy.