Why do so few stocks get over $400, or even over $200, and should you care? Most companies care about the price of their stock, and actually take measures to keep it down. Splitting shares or issuing new stock can keep the price low. But price is not the same as value. Shares which are trading for over $1,000 each can make it sometimes tough to even afford a handful of shares.
TUTORIAL: Investment Valuation Ratios
Berkshire Hathaway (NYSE:BRK.A) $114,700
Berkshire Hathaway has the highest shares on the New York Stock Exchange, so it needs special attention. It is over $110,000 because it doesn't split its shares. Normally a company will complete several 2;1 splits over the years, which doubles the shares outstanding but also cuts the price in half. Famous investor Warren Buffett keeps the price high to deter short-term traders from creating excessive volatility. At one point this year it cost over $140,000 per share. At that price it trades about 450 shares every day. There is a lower priced option with Berkshire Hathaway B shares (NYSE:BRK.B), which trade around $75 which were $3,000 per share until a 50;1 split in 2010.
Buffett created this holding company, which is so big that it doesn't just acquire buildings or factories; instead it often gobbles up whole companies. A true conglomerate, Berkshire owns retail, insurance, railways, furniture stores and more.
Seaboard Corporation (NYSE:SEB) $2,460
Seaboard Corporation went public in 1959 through a merger with Hathaway Industries, Inc. It deals in several areas including ocean transportation, pork production, commodity merchandising as well as an energy producer in the Dominican Republic. As you will see in most of these companies it has never split its shares and operations span several industries.
NVR, Inc. (NYSE:NVR) $700
NVR is a homebuilder and mortgage banking company in the United States. It has also never split any of its stock. Its shares took off in the early 2000s just as the tech bubble was popping. Shares went from $70 to about $700 in about 10 years.
Google Inc. (Nasdaq:GOOG) $600
Google waited until after the dotcom bust to go public when it issued shares in 2004. This was a highly anticipated IPO which closed the day around $100. Since then there have no splits and nearly a 500% return to those who have bought and held.
Priceline.com, Inc. (Nasdaq:PCLN) $525
Priceline held its initial public offering in 1999 at $16 per share. This was in the last stages of the dotcom bubble. About a month later the stock jumped to $120 per share. The bubble burst and the price dropped to around $1.30 by 2001. In 2003 it did a reverse split (1:6) which means every six shares you owned was now one, but that one was worth six times the price. If this split had not happened the current price would be around $87.50 each.
The Washington Post Company (NYSE:WPO) $415
The Washington Post company has not split its shares since it went public in 1971. At that time the class B shares were available to the public at around $26.
White Mountains Insurance Group, Ltd. (NYSE:WTM) $415
White Mountains insurance Group deals in insurance and reinsurance. Buffett's invested in insurance companies back in 1967 which was the beginning of Berkshire Hathaway's rise.
Alexander's Inc (NYSE:ALX) $415
Rounding out the over $400 list is Alexander's inc. which is actually a Real Estate Investment Trust (REIT). It allows you to buy shares in a company which invests in properties and distributes the profits in the form of dividends. This means a $3 dividend for every share you hold every three months. This can obviously change.
I once heard a friend say to stay away from stocks with prices is over $200, because a $200 stock would need a $40 increase in price to gain 20%. It would be much easier for a $20 stock to move $4. For the record this is not true, sort of. A lower priced stock can be more volatile but the value of a stock is due to many factors.
Penny stocks, for example, will usually have low volume and can be very small companies. There is often less information available and less coverage by analysts. A single event or a few speculators can easily create huge jumps or drops in share price.
Low prices don't always mean you are dealing with a small company. Take Synovus Financial Corp. (NYSE:SNV) they trade around $2 per share. Because they have 785 million shares outstanding they have a market capitalization of $1.6 billion. Ultimately, the price is based on what that share represents: partial ownership in the company.
To find the true value of these shares you need to look at a variety of metrics, most of which are calculated per share, to make it easier to compare to their price. For example a very popular metric is the price to earnings ratio. Investors basically see how much it costs to buy a part of the profits of the company. The lower the P/E the better the value, but be careful to only compare similar companies. For example if you bought one share of Seaboard Corp. for $2,300 you are paying about $9 for every $1 of earnings over the last year. But take a look at Hormel Foods Corp. (NYSE:HRL) it costs $29 per share but you need to pay $17 for every dollar of earnings. In this case the $2,300 share is a better value. (For more on the P/E ratio check out Profit With The Power Of Price-To-Earnings.)
The true value of a stock goes beyond the price you pay, or even what you get right now for that price. The true value of a stock is a moving target based on future prospects. Any company can have a great year, but value can be highly dependent on projections. Analysts scrutinize figures such as the potential growth rate of the economy, the strength of the industry and the prospects of specific companies. In the end, high price doesn't always mean overpriced.
InvestingInvestors would be wise to emulate the approach to the markets that Hetty Green used to grow her fortune.
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