The prestige, profits and perils of high-priced stocks
When you pay hundreds of dollars a share you get successful stocks, says this U.S. advisory, but you may not get long-term security.
At $120,000 a share, most people can’t even afford just one.
That’s the lordly price tag attached to the “A” shares of Mr. Warren Buffett’s Berkshire Hathaway (NYSE-BRK.A).
Despite the embarrassment of a recent insider trading scandal in his organization, Mr. Buffett is still widely regarded as the world’s most successful investor.
And the “B” shares of his company are a much more affordable $80.
But how much should you pay for the expertise of Mr. Buffett, or Mr. Larry Page or Mr. Steve Jobs or Mr. Jeff Bezos?
They are the movers and shakers behind some of the most expensive stocks in America.
Mr. Andrew Leckey wonders whether it’s worth paying hundreds of dollars for those shares. In his “Successful Investing” column in the Bull & Bear Monetary Digest, he puts the question to a group of experts.
They all agree on one point. If you own these stocks, you must monitor them carefully.
And one expert contrasts them with blue chip stocks that choose to split their shares rather than let them spiral up in price.
Monstrous ratios
Here are the specific prices Mr. Lecky is discussing, in ascending order. Mr. Bezos’ Amazon.com Inc. (NASDQ-AMZN) trades at $206 (it shot up by $1.69 yesterday).
Apple (NASDQ-AAPL), the brainchild of Mr. Jobs, trades at $346.57.
Google (NASDQ-GOOG), headed by Mr. Page, trades at $535.05 (although it was as high as $642 in January).
None of these stocks pays a dividend, so investors are in the game strictly for capital gains.
Rather than splitting their shares, expensive stocks like these seem to feel the share price is attractive enough as it is and that interested investors will be content to buy fewer shares, says Mr. Leckey.
Mr. James Hardesty of Hardesty Capital Management in Baltimore adds another element — prestige.
“Owning a high-priced stock implies you have a very high-quality company and are in an elite group,” he says. “These are generally companies that are performing well — at least in the short term — and their news is good.”
The problem is that these stocks are often “priced to perfection,” he adds. While they may deliver perfection in the short run, it is not certain they can keep it up indefinitely.
Amazon, for instance, has a monstrous price/earnings (p/e) ratio of 89, and trades at 54 times projected earnings (most stocks are considered overpriced at a ratio of 20).
A high price/earnings ratio can often go before a fall, this expert notes.
800-pound gorilla
Market leaders change over the years, says Mr. Kelley Wright of the newsletter Investment Quality Trends of Carlsbad, California. He recalls the phrase, “What’s good for G.M. is good for America.” But as General Motors proved, trends change and trendsetters change.
Google is the 800-pound gorilla in the online field and its high price is the mark of its dominance. But not all big companies buy into this logic.
Other firms prefer to split their shares. A typical 2-for-1 split turns a formidable $100 price tag into a more accessible $50.
McDonald’s (NYSE-MCD) and drugstore chain Walgreen Inc. (NYSE-WAG) are two successful firms that follow this policy. McDonald’s trades at a hefty but not unaffordable $80.66 — and yields 3 per cent on its $2.44 dividend. Walgreen is at $44.93, yielding 1.6 per cent on a $0.70 dividend.
IBM (NYSE-IBM) falls between the two policies. It is not cheap at $172.24, but it used to let its price roll up into the $300 to $400 range before it started splitting shares. It yields 1.7 per cent on its $3 dividend.
Unavoidable considerations
“The psychological purchasing advantage of a lower price per share remains,” notes Mr. Leckey, but brokerage fees have become so competitive that buying fewer shares has become easier.
Mr. Paul Nolte of Dearborn Partners of Chicago observes that you used to get a break on commissions when you bought a round lot of 100 shares, “but these days buying 10 shares in a company can be as inexpensive as buying 100 shares.”
Yet each of these experts agrees that you must monitor high-priced stocks very carefully. Berkshire Hathaway’s “B” shares are affordable, and the company is worth a great deal. It could be liquidated at a much higher value than that at which the stock trades, notes Mr. Hardesty.
But it is so big that Mr. Buffett can no longer simply buy a stake in a company. He must buy the whole thing to make a difference to Berkshire. Then there’s the unavoidable consideration of Mr. Buffett’s age. He will be 81 in August.
Similarly, Mr. Jobs’ innovative ideas have kept Apple in the forefront of change, from the Mac computer to the iPhone and iPad. Thus his bouts with cancer naturally weigh with investors.
Google is in tune with a younger generation, says Mr. Hardesty, but how many college kids, or recent graduates, can afford to buy even 10 or 15 shares at its elevated price?
By the same token, Amazon is the world’s largest online retailer with a solid reputation for service and loyalty, but ventures outside its core business have not done well.
In short, when you pay hundreds of dollars a share for a stock, you are getting a very successful company. But you are not necessarily purchasing future success.
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