Friday, June 20, 2014

Trading Idea: The Priceline Group (PCLN) - Cup and Handle Base

The Priceline Group (PCLN) advanced over 80% since breaking out of a fifteen month cup and handle based in May 2013 and over 1,000% since the bear market bottom in 2009. The stock is currently forming a cup and handle base, which could be considered a late stage base depending on base reset rules (vary by strategy). The left side of the base is a bit wild and loose and volume barely materialized as the stock climbed up the right side, but there are several signs of support on the daily and weekly chart (high volume reversals, reverse churning, and tight closes). The stock may need to re-consolidate to tighten up, but should be considered on a breakout attempt.

Quarterly and annual sales and earnings growth are expected to grow 20%+ for at least the next five years. Margins are at their highest levels historically and expanding and return on equity has been consistently north of 30%. Expanding margins and strong sales growth has helped the company beat earnings 3.6%, 7.1%, 6.8%, and 12.9% over the last four quarters.

Positions can be initiated anywhere between here and the $1,300 handle high breakout. Protective stops should be placed below $1,180. Take the wild and loose, potentially late stage consolidation into account when managing the trade. Limit losses and expect improvement in price volume action as the stock advances or consider quick profit taking.

Our valuation model prices the stock around $1,430 over the next few months, and between $1600 - 1,837 (33 - 53%) over the next twelve to eighteen months if the company delivers steady growth with expanding margins.

Full Disclosure: No Position

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