Three Stocks: Expensive yet Cheap

By Jon Quast - August 27, 2012 | Tickers: AAPL, GOOG, PCLN | 0 Comments

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What makes a stock expensive?  What makes one cheap?  It's funny, a Webster definition of "what is cheap" or "what is expensive" when it comes to Wall Street, doesn't really exist.  Oh, you'll find something if you search for it online.  It'll sound reasonable, until you do some more digging and come across a different explanation that also seems reasonable.  Really, cheap and expensive mean different things to different people.

To me, when I talk about cheap and expensive, I'm talking about the value of a company. I am concerned with how much money is made per share that exists, and how exactly does the company plan to continue to increase how much each share is making.  I don't factor price into the equation.  In my opinion, stock price is often irrelevant to company value.

There are three companies that I would like to present to you, who famously get heckled for being too expensive. But I think that they are three of the biggest bargain opportunities out there.  These three companies are none other than Apple (NASDAQ: AAPL), Priceline (NASDAQ: PCLN), and Google (NASDAQ: GOOG).

*these numbers are based on the average analyst estimate for next year's earnings and current share price

Before any of you call for my psychiatric evaluation, allow to explain why we should discuss this.  The reason I bring this subject up is because it is a valuable investing lesson.  According to the info I've shown you, these three companies are all large-cap businesses, but they are still growing very fast.  The price is high, but price to earnings is very low considering how fast they are growing.  If these were small cap stocks, most likely we wouldn't be able to stop talking about the bargain these companies were.  But being that they are large cap companies, we have to force ourselves to look beyond market cap and share price to recognize the wonderful value that is hiding in plain site.

Value investing is the key to success in the market (and lottery-style luck is another key that can work also, only it can't be taught).  Think of the stock market like real estate for a minute.  Is $500,000 a lot to pay for a house?  Well, it kind of depends.  Is it a 1 bedroom studio, or a 5 bed/ 5 bath?  Is it in the Ozark Mountains of Arkansas, or on the beach in Malibu?  Buying a 1 bedroom studio in the woods of Arkansas wouldn't be a deal, but a mansion on the beach of Malibu would.  The price isn't so much the issue.  The house is cheap or expensive when viewed in relation to the house's value.

These three companies are value opportunities regardless of the price tag they tote.  They will continue to appreciate in value.  I wrote in another article, why I think that Priceline is on sale right now.  Recent quarterly results showed an increase in revenue and net income, despite several tough obstacles thrown at them.  They missed expectations, but the miss was accompanied by some stellar growth.

You may wonder where Google has to go from here.  Many had hoped that social networking might be the next ace up their sleeve, but Google Plus seems to have had little impact to date.  While their social network isn't changing the world, Google cloud services just might.  In the rapidly growing cloud industry, Google has thrown their name in the hat with Google Compute Engine.  It's still early on, but this is a very likely future revenue boost for the G-men.

And what of our dear friends at Apple?  Their numbers are just mindblowing (I wish I could be more specific, but my mind is blown).  It's really hard to comprehend how many iPods and iPhones have been sold in such a short time.  All the numbers say that these products are still growing in sales.  As investors, we can't bank on the eternalness of the iPhone.  There will come a day when people will move on.  It's human nature.  One day we'll look back and say "remember the iPod?  That was fun."  These products will eventually give way for something else. But I would bet that Apple will be standing there on the other side, offering the populace a new product.  The iPad is a case in point.  Apple knows what people want, and has been giving it to them.  They've established themselves as the leader in how people consume music, and movies.  Soon they may figure out how to become the leader in TV's as well with the ever-rumored Apple TV.  

As these companies continue to grow and perform well for their holders, don't say I didn't tell you so.  These companies are growing fast and without the high P/E ratio that normally accompanies such growth companies.  Sure, there may come a time when you need to sell all three, but that day is not today.

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