Alan Brochstein Screens for Stocks Approaching $100
This week, a lot of attention has been paid to a milestone on the NASDAQ. A well-known company’s stock has surged to $500 a share for the first time ever. This is a unique company that has created its own market that we could only have imagined several years ago. I bet you think I am talking about Apple (AAPL), and, of course, I am, but I could just as easily be referring to Intuitive Surgical (ISRG), which I wrote about a year ago when it was just $260 per share. Stock splits sure seem to be losing their popularity!
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In the olden days, companies would almost always split their stock (increase the number of shares outstanding and lower the trading price accordingly), but there was a good reason: It was more difficult to buy fewer than 100 shares (an “odd-lot”). In fact, there was even an “odd-lot charge”. Companies, then, in order to appeal to a broader universe of investors, believed that a lower price per share would perhaps increase the total value of the company or at least improve the liquidity. These days, for a very low flat fee, an investor can buy a lot of stock. The commissions are so low that they are almost irrelevant to the long-run success of an investment.
Now, if you have ever eaten a pizza, you probably know that no matter how you slice a 12-inch pie, it’s still a 12-inch pie. You won’t get any fuller eating 8 slices than you will by eating 6! The same is true for the total value of a company. A company with 10mm shares trading at $100 is worth $1 billion, just like a company with 50mm shares trading at $20.
In the S&P 500, 44 companies (about 9%) trade above $100 per share. I mentioned two that trade above $500, but there are two that trade even higher: Google (GOOG), which I wrote about in December, and Priceline (PCLN). I am often amazed by how challenged some investors are when discussing these high-priced stocks. A $800 target on a $600 stock seems “outrageous” to some, while they might not think twice about a $80 target on a $60 stock. Do they not understand the pie analogy?
I believe that investors think that they have a better chance of seeing a $2 stock run to $3 than a $200 stock run to $300, but the chances might actually be lower. Why is that? There is a reason a stock gets to $200, and there is a reason a stock gets to $2. While it’s no guarantee, momentum often persists for long periods of time. For the company trading at a high price, they just need to keep doing the things that have brought them success before. It’s true that this doesn’t always happen, but it seems a lot easier than what the low-priced companies need to do: Reverse the problems.
When I look at a stock, I don’t pay too much attention to the price, focusing instead on the market cap (number of shares times the price). To me, AAPL may be $500, but it’s really $466 billion. I try to tie this value to the fundamentals of the business, like earnings. Imagine if you owned AAPL but sold it at $200 just because the price seemed “high”. The smartest thing you can do is to focus on the value rather than the price: A $200 stock can be very inexpensive, and a $2 stock can be extremely overpriced.
One odd thing I have noticed over the years is that stocks tend to stall as they approach a “century” level, like $100. I think that it makes sense that there is some natural resistance, with $99 sounding a lot cheaper than $101, even if it’s the same 2% difference as that between $9.90 and $10.10. Often, this quirk can create a great entry. I have been watching closely a stock on my watchlist that seems to be stalled near $100 – Middleby (MIDD). I can’t predict when it will get through 100, and it might not ever do so, but I can make the case that it perhaps already should (we’ll leave that for another day).
With this in mind, I wanted to share a quick screen designed to highlight some potential opportunities. Here are the parameters I used:
? > $500mm market cap
? Stock price > $90 but < $100
? Within 4% of its 52-week high
? 5-year High < $100
? EPS Growth (last 4 quarters) > 10%
Here are the five that made the cut:
Keep in mind that these are not recommendations. You should do your own thorough investigation of any investment you make.
I sorted the list by economic sector, and we have choices in three different ones. I included a few other columns, including the 52-week and 5-year price ranges, the return over the past year (only one is up sharply), the forward PE (all below 20X), the average PE over the past 5 years (none extremely above the average) and projected earnings growth for 2012.
So, hopefully I have given you a few ideas to ponder and maybe some stocks to consider as well. Yes, the idea is to “buy low and sell high”, but sometimes a stock with a high price can have a low (or at least reasonable) value. Through our screen, we were able to find some stocks that are approaching the $100 psychological level. Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities.
Disclosure: GOOG is in the Top 20 Model Portfolio at Invest By Model
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