Glenn Rogers'  Instablog

I wanted to pick up from our story of last fall about the travel sector. Readers will recall that we had a good experience with our TripAdvisor trade (NDQ: TRIP), banking a gain of 48% in four months.

I think the fundamental investment thesis that led me to recommend TripAdvisor is still in place. With improving economies around the world and retiring boomers looking for something to do, strong companies operating businesses that cater to the travel industry should continue to do well.

Naturally, airlines are the first companies one thinks of when it comes to travel. But I've never had a good experience investing in that group other than a recent trade on American Airlines that worked out okay. It was a quick move in and out since good news in the airline industry is often fleeting.

Hotels are another group that should do well and I recently invested in Starwood (NYSE: HOT) and others in the group like Marriott, Wyndham, and Hilton. They should have improving earnings over the next few years.

Also, there are a number of players in the online travel group that make sense. Like TripAdvisor, they will benefit from the increasing trend of people to do their own travel planning and booking without the benefit of a travel agent.

Naturally, the credit card companies are worth considering as well particularly American Express (NYSE: AXP) and I well cover them in detail in future columns.

But the group that I want to focus on this month is the car rental companies. They should do very well going forward and benefit from this macro trend not only in leisure travel but business travel as well. Additionally, there are number of catalysts peculiar to Hertz (NYSE: HTZ) and Avis (NYSE: CAR) that makes an investment in these names even more interesting.

Up until a few years ago, the automobile manufacturers or conglomerates owned the major car rental companies. Ford owned Hertz and Chrysler owned Dollar Thrifty whereas Avis was owned by Cendant and Budget was owned by Transamerica Corporation. Both Avis and Budget were spun off to private equity groups, as was Hertz. So it wasn't until relatively recently that Hertz and Avis had the chance to operate as single-purpose businesses, not driven by either a desire to push excess inventory onto the market or by financial engineering.

Since they became independent they have been very busy on the acquisition side. Hertz was able to buy Dollar Thrifty Automotive Group for $2.3 billion after a long process that included a major battle with Avis over the property. Meanwhile, Avis had already acquired Budget while it was still owned by Cendant. I should mention that there were a number of other transactions involving these companies over the last couple of decades but I'm compressing the history in the interest of time and space.

The bottom line is that we now have coherent ownership and focused management and to some degree a duopoly (not counting Enterprise which is privately held). This should enable these companies to experience pricing power and margin expansion. Slim margins have been an issue for the rental agencies over the years but they should finally be able to expand them going forward.

Recently, Avis announced that it had raised prices by 4% in North America during the first quarter leading to an adjusted profit that exceeded Wall Street's expectations. That in turn prompted Avis to increase its full-year estimates. In fact, Avis has been able to raise its prices a total of six times year-to-date. Hertz was also able raise rates by similar amounts and volumes for both companies were up as well.

Both companies have continued to acquire additional related businesses. Avis bought out car sharing pioneer Zipcar in March and has begun expanding that franchise into more cities in North America. Avis also acquired Apex Car Rentals which helped their international revenue rise. Meanwhile, Hertz continues to digest their recent purchase of Dollar Thrifty and expanded their competition to Zipcar with hourly rentals of their own which they are calling the 24/7 platform.

So far Hertz is showing better results. The company reported a first-quarter profit of $18 million compared with a loss over the same quarter the previous year of $56.3 million (figures in U.S. dollars). Revenue jumped by 24%, to $2.4 billion. The average number of Hertz-operated cars was 757,100, up 27% from the prior year. That was mostly driven by the Dollar Thrifty acquisition.

Avis reported that quarterly earnings declined 33% from the prior year quarter although revenue increased by 4% to $1.69 billion. As mentioned, Avis revised its outlook to reflect the acquisition of Zipcar and forecast revenue increases year-over-year of between 6% and 9%.

Both stocks tend to trade in lockstep. I consider both as buys but based on the recent results I give a slight edge to Hertz but even though on a p/e basis it looks to be more expensive. Both stocks are up over 40% year-to-date but, as we discovered with our Boeing recommendation, waiting for a pullback can prove expensive.

If you want to hedge your bets, I recommend taking a half position now. You can add more later when and if we eventually get the long predicted market correction. It seems that everyone has been waiting for it, but so far it's been like waiting for Godot.

Action now: Buy Hertz Global Holdings with a target of $30. The shares closed in New York on Friday at $24.85.

Disclosure: I am long CAR.

Baidu Inc. (NDQ: BIDU)

Originally recommended on Feb. 21/11 (#21107) at $122.80. Closed Friday at $85.08. (All figures in U.S. dollars.)

Baidu is China's equivalent of Google. It is the leading Chinese language Internet search engine, covering nearly 80% of its market.

The stock was recommended in February 2011 when it was trading at $122.80. After that it moved up to nearly $160 per share and then proceeded to bounce around before starting a steep decline which has taken it to a two-year low of $85.08.

Apart from being the dominant search engine in China, the company also has a large suite of security software offerings. China has nearly 500 million Internet users and one of the few constants in the relatively new web age has been the success of search engines. Almost nothing comes close in terms of the sheer volume and necessity that they provide.

Currently, the company is trading at a substantial discount my projected fair market value of $136. The decline in the share price reflects investor uneasiness about the ability of the Chinese to negotiate a soft landing from their real estate bubble as well as increasing competition from Qihoo 360 Technology (NDQ: QIHU). Additionally, there is some question as to whether the search engine business will be negatively impacted by increasing traffic from mobile devices.

Personally, I think that BIDU will hold on to most of its market share and will continue to grow revenues in excess of 40% in 2013 with earnings per share increasing at a compound annual growth rate of 29% over the next three years. Gross margins are very high, exceeding 70%.

The company reported revenue of $3.58 billion in 2012, an increase of 53.8% over the year before. Operating profit was $1.77 billion, up 45.9% from 2011, while net earnings were $1.68 billion ($4.79 a share), a 57.5% improvement.

If all this continues to hold, there should be significant upside in the shares even though the chart looks very scary right now.

This stock is definitely not for widows and orphans and is highly volatile but there is tremendous opportunity for growth and price appreciation should follow.

Action now: Buy with a target of $120.

Disclosure: I am long BIDU.

CVS Caremark Corp. (NYSE: CVS)

Originally recommended on April 19/10 (#20115) at $37.14. Closed Friday at $53.58. (All figures in U.S. dollars.)

Another stock that has done well for us is drugstore chain CVS Caremark. It was originally recommended in April 2010 at $37.14 and closed Friday at $53.58.

The company reported fourth-quarter and year-end results in February and they were very good. Net revenues were $123.1 billion, a 15% improvement over the year before. Net income rose to $3.03 per share compared to $2.59 in 2011.

The stock has recovered well from its low of below $25 in March 2009. However, it is now trading at an all-time high so we're going to ring the till and take our profits. Including dividends we have a total return of 50.2%.

Action now: Sell.