Are High-priced Stocks Worth Buying?

By Andrew Leckey

How much would you pay for the services of Warren Buffett, Larry Page, Steve Jobs and Jeff Bezos?

Quite a bit, apparently. Those CEOs of Berkshire Hathaway Inc., Google Inc., Apple Inc. and Amazon.com Inc. lead companies that command some of the highest individual stock prices.

Many companies split their shares when they reach certain price levels to get more investors interested and to broaden their shareholder base. A typical 2-for-1 split turns a $100 a share stock into a more accessible $50 stock.

Other companies could care less and let their stock prices escalate to hundreds of dollars. Their stocks are attractive enough anyway, and they figure that if investors are really interested, then they can simply buy fewer shares.

Then there are the bragging rights of investors.

"Owning a high-priced stock implies you have a very high-quality company and are in an elite group," said James Hardesty, president and market strategist with Hardesty Capital Management in Baltimore, Md. "These are generally companies that are performing well -- at least in the short term -- and their news is good."

The problem is that stellar stocks are often "priced to perfection," Hardesty cautioned. While they are capable of delivering short-run perfection, it is not certain that they can do so indefinitely. Stocks such as Amazon.com with its high price/earnings ratio of 65 are especially susceptible to dramatic price drops.

"In every market cycle there are leaders and these leaders change over the years," explained Kelley Wright, managing editor of Investment Quality Trends newsletter in Carlsbad, Calif., noting that the phrase "What's good for GM is good for America" was commonly voiced when that carmaker was dominant. "They have everyone's attention and they are viewed as the trendsetters."

For example, Google is the 800-lb. gorilla in the online field, and its high stock price indicates that to the world, said Wright. Yet not every top-notch company buys into that logic.

Firms such as McDonald's Corp. (MCD) and Walgreen Co. (WAG) regularly split shares when they reach certain price points, in part because they like investors being able to easily buy 100 shares at a time. International Business Machines Corp. (IBM), while still pricey, used to let its shares roll on up into the $300 to $400 range but has since instituted a policy of splits.

The psychological purchasing advantage of a lower price per share remains, though brokerage fees have become so competitive that buying fewer shares isn't quite the problem that it once was.

"You used to get a break on commissions if you bought a round lot of 100 shares, but that's changed in the past 20 years so it doesn't matter so much anymore," said Paul Nolte, managing director of Dearborn Partners in Chicago, Ill. "These days, buying 10 shares in a company can be as inexpensive as buying 100 shares because commission rates are more standard, stable and lower."

The king of high-priced shares is Berkshire Hathaway Class A (BRK.A). The less-expensive Class B shares (BRK.B) have less voting rights. "Buffett has said he's never going to split that stock in the future because there's no benefit in doing so," said Nolte, while Wright noted: "Investors are buying Buffett because he has been 'the man' over the decades, and it is great to ride his coattails."

Analysis proves that paying a lot for Berkshire isn't such a bad idea.

"Take apart Berkshire Hathaway and value its different parts -- such as the reinsurance business, Burlington Northern Santa Fe, Geico and the stake in Coca-Cola -- and you see the company is really worth quite a bit," said Hardesty, who believes that the company could be liquidated at a much higher value than that at which the stock is currently selling.

The problem is that Berkshire has become so big that Buffett can no longer simply buy a stake in a company but rather must buy the whole thing in order to make a significant difference to Berkshire, Hardesty added. Another unavoidable consideration: Buffett is 80 years old.

Google, benefiting from increased online advertising, brand strength and a strong cash position, has high ambitions and is in tune with a younger generation. "A college kid who uses Google a lot might get interested in investing in it, but, at its current price, even buying 10 or 15 shares would be a lot of money," said Hardesty.

Apple, with the rising potential of its iOS mobile operating system and its proven ability to attract new customers, draws upon the genius of Steve Jobs to come up with innovative ideas such as the iPhone and iPad. The health of Jobs is therefore watched closely by investors.

Amazon.com Inc. is the world's largest online retailer known for strong customer service and customer loyalty. However, its ventures outside of its core business haven't done well.

The moral: Some outstanding companies do merit a pricey stock, but every company must still be monitored.

What are High-Price Stocks

High-priced stocks, also known as expensive stocks or high-priced equities, are shares of companies that have a relatively high market price per share compared to other stocks. The price per share of a stock is determined by dividing the company's market capitalization (total market value of all outstanding shares) by the number of shares outstanding.

The price of a stock is influenced by various factors, including the company's financial performance, growth prospects, market demand, investor sentiment, and overall market conditions. Some high-priced stocks are associated with well-established and successful companies that have demonstrated consistent growth, strong profitability, and a track record of delivering value to shareholders. These companies may operate in high-growth industries or have a unique competitive advantage, which justifies a higher valuation.

Investors may perceive high-priced stocks as an indication of quality or believe that these companies have significant growth potential. However, it's important to note that the price of a stock alone does not determine its value. A high price doesn't necessarily mean a stock is expensive or overvalued, just as a low price doesn't always indicate a good investment opportunity.

When considering high-priced stocks, investors should assess the company's fundamentals, including its earnings, revenue growth, cash flow, and profitability ratios, such as price-to-earnings (P/E) ratio and price-to-sales (P/S) ratio. Additionally, evaluating the company's competitive position, industry trends, and future prospects is essential for making informed investment decisions.

It's worth mentioning that investing in high-priced stocks can carry risks. A high valuation may imply higher expectations and leave less room for error. If a company fails to meet those expectations or faces challenges, the stock price could experience a significant decline. Furthermore, high-priced stocks may be subject to increased volatility due to market speculation and investor sentiment.

Investors should conduct thorough research, diversify their portfolios, and consider their investment goals, risk tolerance, and time horizon before investing in high-priced stocks or any other type of investment. Consulting with a financial advisor can also provide valuable insights and guidance tailored to individual circumstances.

Available at Amazon.com:

The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions

Investing - Are High-priced Stocks Worth Buying? | Successful Investing

Wealth & Finance ...

CAREERS | INVESTING | PERSONAL FINANCE | REAL ESTATE