Questions from Investors: “Can an investor make money in ‘high-priced’ stocks?”

Q:  “Can an investor make money in ‘high-priced’ stocks?”

A:  In the investment world, the tidbits of advice that you get from relatives and co-workers are so consistently wrong that a person could probably make a lot of money doing the opposite of “what people say”.  When people tell me that they “don’t buy high-priced stocks”, or stocks over a certain dollar amount, I know immediately that they are a naive investor who can’t get out of their own way in order to make money.

The price of a stock is just one of many factors that goes into a buying decision.  A $100 stock, for example, could be undervalued or overvalued, depending on the earnings per share, the earnings growth rate, the company’s success with its products, the debt ratio, and more.  More specifically, a $10.00 stock with three years of losses, on the verge of bankruptcy, would be overvalued.  A $300 stock with earnings per share of $60.00, a PE of 5, and projected earnings growth of 12% per year would be undervalued.

More importantly, what makes these stocks go up?  “More buyers than sellers.”  And who buys in large enough quantities to influence share price movement?  Professional investors, financial companies, mutual funds.  You will never hear professional investment managers say, “We don’t buy high-priced stocks” because they know there’s no financial logic in that statement.  They will use their established investment strategies to assess stocks, and the strategy will tell them whether MasterCard Inc. is cheap or expensive at $540 per share.  And then they will buy or sell accordingly.

If it were true that “high-priced stocks are too expensive”, then companies with high-priced stocks would routinely split their stocks, thereby lowering the price.  But none of the math changes.  It’s hocus-pocus; a strategy that big companies employ to make investors happy, because they know that investors are naive enough to believe that cutting the price in half actually has meaning.

There is also the mistaken belief on the part of new investors that “a $100 stock can’t go up as much as a $10 stock”.  Nonsense.  All company factors being equal, you will make exactly as many DOLLARS on a $5000 investment in a $100 stock as you will on a $5000 investment in a $30 stock.  The number of shares you own is not a factor; it’s the dollar amount invested that determines how many dollars you will make.

I personally own 20 stocks right now, ranging in price from $22 to $802.  Also, the stock that’s up the most year-to-date in the Goodfellow LLC Growth Stock Portfolio for 2013 is Allergan, up 21.69% at $111.63.  If it were true that high-priced stocks wouldn’t go up well, why would I own them?  Why would I put them in public portfolios by which people judge my success?

The lesson to be learned here is that the stock price means nothing without examining other facets of a company and its balance sheets.  Your job as a stock investor is to learn more about the craft as time goes by, so that you can improve your portfolio performance.  Start by challenging your assumptions, especially when they start with the phrase, “Everybody knows that….”

Happy investing!

Crista Huff

President

Goodfellow LLC

 

research@goodfellowllc.com

 

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