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Should Value Investors Buy Booking Holdings (BKNG) Stock?

Alex Smith

Bireme Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. In the letter, the hedge fund said that its flagship U.S. equity strategy, Fundamental Value, returned -26.4% on a net basis. The fund underperformed its benchmark, the S&P 500 Index which returned -19.4% in the same quarter. You should check out Bireme Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Bireme Capital highlighted a few stocks and Booking Holdings Inc. (NASDAQ:BKNG) is one of them. Booking Holdings is the world’s leader in online travel. Year-to-date, Booking Holdings Inc. (NASDAQ:BKNG) stock lost 20.6% and on May 22nd it had a closing price of $1,631.30. Here is what Bireme Capital said:

"As the world’s premier online travel agent, Booking Holdings has seen their business evaporate since mid-March. In fact, a recent filing indicates that gross bookings on their platform are down more than 85%.

Booking, unlike some travel-related businesses, is well-positioned in two major respects: a variable cost structure and a strong balance sheet.

Their marketing spend, which totaled nearly $5b in 2019, will be quickly flexed downward as demand for travel wanes. Their costs to process credit card transactions will also drop as bookings fall. All in all, we expect Booking’s expenses to decline by over $3b in 2020 and a further $1b in 2021 if travel restrictions persist. This should allow them to burn only about $3b of cash through year end 2021.

That amount would be less than half of the $7.2b in cash and short-term investments on the company’s balance sheet as of 12/31/19. But out of an abundance of caution, the company made some additional moves to bolster their reserves.

Their first action was to amend the covenant on their $2b revolving credit facility, which had previously required less than 4x debt to EBITDA. The company changed this to a minimum liquidity requirement of $5.5b.Then Booking borrowed a sum of $4b over multiple bond issuances. This will allow the company to remain solvent even if the pandemic lasts for much longer than expected.

While their stock price will remain sensitive to COVID-19-related developments, we think Booking’s earnings power of >$100 per share should return by 2023 and perhaps sooner if vaccines, treatment, or herd immunity develop more quickly than expected. It is also possible that weakened hotel operators may come to rely on OTAs more than ever after this crisis, as they did after 2008.

We believe the stock is undervalued at current market prices."

In Q1 2020, the number of bullish hedge fund positions on Booking Holdings Inc. (NASDAQ:BKNG) stock increased by about 22% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with BKNG’s growth potential. Our calculations showed that Booking Holdings Inc. (NASDAQ:BKNG) is ranked #28 among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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Disclosure: None. This article is originally published at Insider Monkey.