(Bloomberg Businessweek) -- An investment in a large-cap stock mutual fund right now, more than anything else, is a bet that Priceline Group Inc. will outperform the rest of the market. That's looking increasingly like a bad bet for active managers who are paid to find the good ones.
Bank of America recently looked at the holdings of active managers and called the online travel booking company the most "overowned" stock in the market. Nearly 40 percent of active large-cap mutual funds own the stock, and on average Priceline makes up 2.6 times more of their portfolios than its weighting in the S&P 500. Credit card company Visa Inc., by Bank of America's measure, is the next most overowned stock, with an average weighting of 1.9 times the S&P 500.
There is a good reason that Priceline has been a darling. Its shares have risen consistently for much of the past year and a half, climbing 40 percent in that period, nearly double the market in the same time. But Wall Street may soon regret double-booking the stock. Shares of Priceline fell $200, to $1,849, in two days after its most recent earnings report in early August. The stock has been basically stuck there since. Priceline's biggest problem is that the money it spends on marketing and drawing users to its online service, so-called paid traffic, is not boosting sales as it once used to. That may signal both that Alphabet's Google and other online gatekeepers are making it more expensive to compete on the web or that Priceline is losing ground to rivals Expedia Inc. and TripAdvisor Inc.
Priceline breaks out what it spends each quarter in performance advertising, which it has done since the beginning of 2015, and the cost has been rising. The company allocated more than $1.1 billion to performance advertising in the second quarter of this year, up from just more than $750 million in the same quarter two years earlier. At the same time, the return the company is getting from the additional ad dollars is shrinking. In 2016, gross bookings grew 360 percent compared with what the company spent on performance advertising. In the fourth quarter alone, the company's return on performance advertising was a remarkable 420 percent. But in the second quarter of 2017, that return plummeted to just 255 percent.
Perry Gold of MoffettNathanson, the only analyst to downgrade Priceline before its second-quarter earnings disappointment, said Wall Street might have mistook the company's huge ROI on ad dollars as a sign that it was doing something right and not that its rivals were facing their own struggles, which may have actually been the case. Expedia spent 2016 working on integrating its large acquisition of Orbitz. TripAdvisor was making the transition from a site focused on reviews and travel tips to one that also does bookings.
This year, however, Expedia and TripAdvisor have smoothed out their internal issues and begun to increase their own similar spending on performance advertising, and that's most likely why Priceline is not seeing the same return on ad dollars. Unlike Priceline, Expedia and TripAdvisor do not break out what they spend on targeted advertising. In general, Priceline does still appear to be more efficient than its rivals in marketing spending, but they have closed the gap.
On top of that, Priceline's shares, after that 40 percent increase in 18 months, are no longer cheap. The stock has a price-to-earnings multiple of 25 based on this year's estimated earnings. Expedia, on the other hand, has a P/E ratio on estimated earnings of 28. But its earnings per share are predicted to more than double this year. Priceline's EPS is expected to rise a much smaller 20 percent.
None of this is to say Priceline's stock will suddenly be a poor investment. I don't plan to use a human travel agent to book any of my vacations again, and I suspect that is true of nearly everyone my age or younger. But the argument for people to continue to choose to invest with mutual funds over index funds (putting aside the larger macro damage passive investing may be doing to the economy) is that active managers have some magical ability to sniff out stocks that will do better than the rest of the market. If Priceline is the best investment mutual fund managers can come up with, I'd guess their future, far more so than Priceline's, is bleak.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.
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