Don't Judge A Stock By Its Price, Rather By Its Fundamentals

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Includes: AAPL, BKNG, GOOG, QQQ, TNH
by: Top Economic Articles

If you thought that Priceline.com (PCLN) was expensive at $573 a couple of weeks ago, you certainly missed the opportunity to profit for the big run up of the stock, trading north of $630 on Tuesday morning.

Priceline.com isn't the only high-priced stock that had a big run up recently. So are Apple (AAPL), Intuitive Surgical (ISRG), Google (GOOG) and Terra Nitrogen (TNH). What drives this rally? Should investors buy into it?

Company

Recent Price

PE*

Operating Margin

Quarterly Revenue Growth

AAPL

$532

10.76

25.80

73.30

PCLN

$635

19.34

23.59

45%

ISRG

516

30

28.17

27.6

TNH

228

16.40

35.73

49.50

GOOG

618

12.14

25.69

25.40

Forward Dec. 31, 2013

Source: Compiled from Yahoo.finance.com

Here are some of the some of the factors behind the rally:

1. Plenty of liquidity, especially among hedge fund managers who can borrow at record low interest rates, which make the opportunity cost of funds committed to these stocks negligible.

2. Positive momentum propelled by record earnings, especially from Apple and Priceline.com. The company reported Q4 earnings of $5.37 per share on revenues of $991 million, beating analyst estimates on both figures by a wide margin.

3. Bullish technicals that reinforce momentum.

4. Strong economic fundamentals. Each company enjoys a sustainable competitive advantage in its industry. Apple in mobile devices, Priceline.com on online hotel reservations, Intuitive Surgical in robotic surgery, Terrra Nitrogen in fertilizers, and Google in search engines.

5. Strong financials. In spite of the big run up in the price of these stocks, they aren't expensive by conventional metrics. Apple, for instance, is trading at a forward PE of 10.76, well below the 14 PE for Nasdaq100 (NASDAQ:QQQ). Furthermore, Apple has an operating margin of 25.80 percent and a quarterly revenue growth of 73.30-- quite impressive for a high-tech hardware company that has been around for some time.

The bottom line: Don't judge a stock by its price, but its economic fundamentals. These five stocks may be high-priced, but not expensive. This means that they are still good buys for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.