Big-name stocks can fetch huge prices – but are they worth it? (Thinkstock)
How much would you be willing to spend on a single share of stock? How about the equivalent of half of your monthly salary? That’s how much some shares are selling for as optimism has returned to global equity markets.
For the average investor, equities that trade in the hundreds or thousands of dollars, euros or local currency can pose a problem.
“Most people place modest investments in stocks and many couldn’t buy any shares of these expensive equities,” said Danny Cox, head of financial planning at UK-based adviser firm Hargreaves Lansdown. Buying a single share in some of these companies can seriously dent your personal finances, he added.
Even if financial experts think the stock price is fair and likely to climb more, individual investors still have to shell out a large lump sum to buy the shares in the first place. Still, there are some ways to get a piece of hot stocks, even if they are trading for more than you might spend on a diamond ring, or even a car.
One share of Warren Buffett’s Berkshire Hathaway will set you back about $181,000. Banque Privee Edmond de Rothchild, a Switzerland-based private bank, is selling for about SWF15,855 a share ($17,382). Japan’s Nippon Building Fund, a Tokyo-based real estate investment trust, goes for ¥1,184,000 ($11,849), a share, while even global brands, such as Apple and MasterCard, cost more than $500 a share to buy. Global technology company Google currently goes for about $1,040 per share.
“If I was starting out I wouldn’t buy one share of Google,” said Mike Ser, an experienced investor and trader coach at Ser Man Traders in Vancouver, Canada. “I want it at a lower price.”
Why so high?
Companies have several ways to bring down their share price. For one, they can split the stock. That halves the trading price and doubles the number of shares outstanding. But some companies want to keep their share prices high.
“They don’t want the speculative shareholder who might buy and sell more rapidly,” said Jason Voss, a former portfolio manager who is now content director at the CFA Institute, a global association of investment professionals. “Clearly, if you’re going to pay $180,000 a share for Berkshire, you have to carefully consider what you’re doing.”
A higher price makes it harder to get in and out of the stock quickly, said Voss. Companies want long-term investors who will stick with the business.
For investors who invest for the long term, the number of shares they hold shouldn’t matter, said Voss. If you own 100 shares of a $500 stock or 1000 shares of a $50 stock and both go up 20%, the gain will be the same.
Long-term investors should also ignore the price per share, and instead hone in on financial ratios such as price-to-earnings, said Voss. The commonly used PE ratio measures the price someone is willing to pay for each dollar of earnings. Always examine the earnings, revenues and profit increases that move a stock’s price higher, said Voss and not the individual share’s monetary amount.
Many companies that are selling for sky-high valuations are still money-making machines, said James Angel, a finance professor at Georgetown University, Washington D.C. Some should be a staple in a portfolio, he added.
Some high-price-tag businesses are considered cheap by investment managers. For instance, Serviceflats Invest NV, a real estate investment trust based in Belgium, is selling for 13,400 euros ($18,131) and is trading at 14 times earnings — less than the average PE of 18 for the US benchmark Standard & Poor’s500 index —which some managers say is cheap. But on the same basis, some analysts think Google is growing fast enough to justify its PE ratio of 29, especially since other high-growth internet companies, such as Facebook or LinkedIn, have much higher PE ratios than that.
Still, at these prices, many investors won’t be able to buy more than just a few of these shares themselves. For example, if you have $50,000, you could buy 100 shares of Google, but you would not have enough money left over to diversify into other stocks.
“If someone doesn’t have the money to buy more than a few shares, then they’re placing a bet on one stock,” said Cynthia Kett, a Canadian financial adviser based in Toronto. “That would be a very risky portfolio.”
How to get a piece
Fortunately, there are alternatives. The easiest way to buy into these companies is through exchange-traded funds, said Kett. Interest in these products is growing rapidly around the world. Deutsche Bank said that global ETFs grew by 30% year-on-year between 2011 and 2012 — in part because they help investors buy pricey stocks cheap.
For $85 a share an investor can purchase The Vanguard Group’s Information Technology ETF and get access to Apple, Google and Visa.
“Usually these big companies are in the top 10 or 15 holdings of the fund,” she said. “You’re getting exposure to those businesses without being significantly overweight in any one.”
Mutual funds also offer a way to buy higher-priced stocks for less, said Cox. As with ETFs, investors can buy industry-specific funds to get exposure to some of these stocks.
If you do want the specific stock, though, you could be out of luck. Even if it’s still attractively valued, you can’t ignore the costs.
“Yes, people should be looking at earnings and other fundamentals,” said Cox. “But you’ve also got to think about how much that transaction will cost.”
Source: This story was re-produced under the BBC’s guidelines for financial journalism. A full version of those guidelines can be found at bbc.co.uk/guidelines.