You Get What You Pay For … Even in the Stock Market
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| By Gavin Magor |
Stock prices aren’t all they seem. In fact, I want to dive in a little bit to show you that some of the highest-priced stocks deserve an even greater share of your attention.
First, let me ask you a quick hypothetical …
Which would you rather own … 10 shares of a $1,000 stock or 5,000 shares of a $2 stock?
If you’re like most people, you’ll say the more, the better.
I can’t blame you. It just sounds so much richer to own 5,000 shares of a stock. But if you snub your nose at higher-priced companies, you’ll miss out on investing in some of the best companies in the universe — and the profits they deliver.
You see, one of the biggest misconceptions among investors is that a high-share price indicates a stock is overvalued.
That’s just not the case. What matters is a company’s underlying value, which is more accurately represented by its market cap.
In the most general sense, it’s a fact that it’s better to own higher-priced companies.
They also tend to be more liquid and higher quality than lower-priced names. Many low-priced stocks are cheap for a reason, usually because of declining earnings and sales … and shrinking market share.
In other words, you get what you pay for — like many things in life perhaps that we regret later. You want quality? You want stability? You want performance?
Look no further than three of the many high-priced stocks trading we often discuss in these pages: Nvidia (NVDA), Broadcom (AVGO) and Costco (COST).
How much would you need to shell out for just one share of each? As of this writing, AVGO shares cost $1,200, while NVDA goes for $630 and Costco is $671. AVGO, by the way, is one of only nine stocks in the S&P 500 trading above $1,000 a share.
If you don’t own any shares in those or other highfliers, don’t worry. It’s not too late to choose quality over quantity and capture your share of profits. If you do, I’ve got some good news for you too. I’ll get to that shortly.
Why Some Stocks Seem Expensive … But Aren’t
The reason all three stocks trade so high is a matter of supply and demand. No one is artificially jacking up the prices. The more investors buy a stock, the higher the price goes. It’s just that simple.
The appeal of companies like Nvidia, Broadcom and Costco lies in their solid fundamentals and histories of strong market performance. Each has remained innovatively relevant with an eye toward the future … and are stalwarts in their industries.
Now, here’s the best part. All companies want their share prices to rise. That’s a no-brainer. But people running them also understand that above a certain threshold, buying shares can become cost prohibitive for investors.
One common practice to make shares more appealing to more investors is a stock split. It can be your best friend when you want in on a stock you think is highly priced or simply out of your comfort level.
Here’s what a stock split is in a nutshell: It’s when a company divides and increases the number of shares available to buy and sell. A stock split lowers its stock price but doesn’t weaken its value to current shareholders. It increases the number of shares and entices would-be buyers to take the plunge.
The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.
For example, if a company issues a 2/1 stock split (it can go as high as 20/1), the value of each share is cut in half. So, if you own 50 shares of a stock that trades at $50 per share, you’ll now have 100 shares that trade at $25 each. Nothing about the value changes, just the amount of shares you would own.
The best part is that stocks often go on a run after a stock split. It renews interest in current shareholders who keep wanting more. And it attracts buyers who wouldn’t otherwise buy the stock at a hefty price.
Nvidia is another great example. The company has undergone a total of five stock splits. The last one happened in July 2021. At the time of the 4/1 split, shares traded for $748 with a post-split price of $187. So, since that date in 2021, NVDA is up around 227%.
Had you purchased one share of NVDA prior to June 27, 2000 (date of its first split), you would be holding the equivalent of around 48 shares today.
With shares back up to $630, I wouldn’t be surprised if Nvidia pulled the trigger for the sixth time.
The below image is NVDA share performance since it went public, resembling a rocket ship headed for outer space. Shares are up around an eye-popping 74,000% since its IPO.
There’s even better news on Broadcom and Costco: Both are rumored to be eying stock splits in 2024.
Finally, in this ever-evolving investment landscape, you can now buy portions of shares or as they’re known: fractional shares. This lets you buy stock based on a dollar amount rather than the number of shares. If you invested $250 in a stock but a whole share costs $1,000, you'd own one-quarter of a share.
The only downside is that should you change brokerages, it’s likely you’ll need to sell your fractional shares before reinvesting at the new one.
Not all brokerages offer this option, but here are a few that do: Interactive Brokers (IBKR), Robinhood (HOOD), Fidelity (FNF) and Charles Schwab (SCHW).
How you manage to buy into Nvidia, Broadcom or Costco — or another high-priced stock — doesn’t matter. But having skin in the game certainly does.
Cheers,
Gavin
