Just Because the Price is High Doesn’t Mean the Stock is Expensive
Alan Brochstein Screens for Stocks Approaching $100
This week, a lot of attention has been paid to a milestone on the NASDAQ. A well-known company’s stock has surged to $500 a share for the first time ever. This is a unique company that has created its own market that we could only have imagined several years ago. I bet you think I am talking about Apple (AAPL), and, of course, I am, but I could just as easily be referring to Intuitive Surgical (ISRG), which I wrote about a year ago when it was just $260 per share. Stock splits sure seem to be losing their popularity!
In the olden days, companies would almost always split their stock (increase the number of shares outstanding and lower the trading price accordingly), but there was a good reason: It was more difficult to buy fewer than 100 shares (an “odd-lot”). In fact, there was even an “odd-lot charge”. Companies, then, in order to appeal to a broader universe of investors, believed that a lower price per share would perhaps increase the total value of the company or at least improve the liquidity. These days, for a very low flat fee, an investor can buy a lot of stock. The commissions are so low that they are almost irrelevant to the long-run success of an investment.
Now, if you have ever eaten a pizza, you probably know that no matter how you slice a 12-inch pie, it’s still a 12-inch pie. You won’t get any fuller eating 8 slices than you will by eating 6! The same is true for the total value of a company. A company with 10mm shares trading at $100 is worth $1 billion, just like a company with 50mm shares trading at $20.
In the S&P 500, 44 companies (about 9%) trade above $100 per share. I mentioned two that trade above $500, but there are two that trade even higher: Google (GOOG), which I wrote about in December, and Priceline (PCLN). I am often amazed by how challenged some investors are when discussing these high-priced stocks. A $800 target on a $600 stock seems “outrageous” to some, while they might not think twice about a $80 target on a $60 stock. Do they not understand the pie analogy?
I believe that investors think that they have a better chance of seeing a $2 stock run to $3 than a $200 stock run to $300, but the chances might actually be lower. Why is that? There is a reason a stock gets to $200, and there is a reason a stock gets to $2. While it’s no guarantee, momentum often persists for long periods of time. For the company trading at a high price, they just need to keep doing the things that have brought them success before. It’s true that this doesn’t always happen, but it seems a lot easier than what the low-priced companies need to do: Reverse the problems.
When I look at a stock, I don’t pay too much attention to the price, focusing instead on the market cap (number of shares times the price). To me, AAPL may be $500, but it’s really $466 billion. I try to tie this value to the fundamentals of the business, like earnings. Imagine if you owned AAPL but sold it at $200 just because the price seemed “high”. The smartest thing you can do is to focus on the value rather than the price: A $200 stock can be very inexpensive, and a $2 stock can be extremely overpriced.
One odd thing I have noticed over the years is that stocks tend to stall as they approach a “century” level, like $100. I think that it makes sense that there is some natural resistance, with $99 sounding a lot cheaper than $101, even if it’s the same 2% difference as that between $9.90 and $10.10. Often, this quirk can create a great entry. I have been watching closely a stock on my watchlist that seems to be stalled near $100 – Middleby (MIDD). I can’t predict when it will get through 100, and it might not ever do so, but I can make the case that it perhaps already should (we’ll leave that for another day).
With this in mind, I wanted to share a quick screen designed to highlight some potential opportunities. Here are the parameters I used:
· > $500mm market cap
· Stock price > $90 but < $100
· Within 4% of its 52-week high
· 5-year High < $100
· EPS Growth (last 4 quarters) > 10%
Keep in mind that these are not recommendations. You should do your own thorough investigation of any investment you make.
I sorted the list by economic sector, and we have choices in three different ones. I included a few other columns, including the 52-week and 5-year price ranges, the return over the past year (only one is up sharply), the forward PE (all below 20X), the average PE over the past 5 years (none extremely above the average) and projected earnings growth for 2012.
So, hopefully I have given you a few ideas to ponder and maybe some stocks to consider as well. Yes, the idea is to “buy low and sell high”, but sometimes a stock with a high price can have a low (or at least reasonable) value. Through our screen, we were able to find some stocks that are approaching the $100 psychological level. Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities.
Disclosure: GOOG is in the Top 20 Model Portfolio at Invest By Model
Options involve risk and are not suitable for all investors. Click here to review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Online trading has inherent risk due to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading. Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. While Delta represents the consensus of the marketplace as to the theoretical price movement of the option relative to the underlying security, and Gamma represents the consensus of the marketplace as to the theoretical rate of change of Delta relative to the underlying security, there is no guarantee that these forecasts will be correct.
At the time of publication and in the preceding month, TradeKing and the third-party content provider did not have ownership greater than 1% in any stocks mentioned here and do not have any other actual, material conflict of interest known at the time of publication. Neither TradeKing nor the third-party content provider, received compensation from a public offering or from investment banking services related to any companies mentioned here within the past 12 months, or expects to receive any in the next 3 months. Neither TradeKing nor the third party content provider engaged in market making in the securities mentioned here. TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders. TradeKing All-Stars provide timely market commentary via the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator's bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.
Alan Brochstein maintains a business relationship with TradeKing.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides selfdirected investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.