Don't Hide From High Share Prices

4/30/2012


Too often, investors shy away from high-priced stocks. Some assume high share prices mean expensive stocks, while others believe lower-priced stocks have more upside potential. But neither of these reasons entirely bears up under scrutiny.

For the cost of one share of Google ($601; GOOG), you can buy 24 shares of AOL ($25; AOL). But the consensus projects 2012 earnings per share of $43.45 for Google, more than twice the earnings of those 24 shares of AOL. With Google trading at 14 times expected 2012 earnings and AOL at 30 times earnings, the higher-priced stock looks a lot cheaper than the lower-priced stock.

On their own, share prices say little about whether a stock is a good value. Management can reduce the price by splitting the stock or raise it with a reverse split. Analysts value companies relative to earnings or book value or cash flow. The stock price is simply the numerator of the price/earnings ratio.

On average, high-priced stocks have done quite well in recent decades. A study of U.S.-traded stocks by a professor at the Queen's School of Business in Ontario, Canada, found that a strategy of buying high-priced stocks and selling low-priced stocks generated market-beating returns from 1963 through 2007.

Our own research shows outperformance among both the highest- and lowest-priced stocks. Much of the outperformance of low-priced stocks appears to stem from their small market capitalization, implying risks many investors will not want to take. Among the large-cap stocks favored by the Forecasts, big prices have historically presaged big returns. In rolling 12-month periods since 2004, stocks with market capitalizations of at least $10 billion and trading at $100 or higher averaged returns of 10.6%, well above the returns of similar-sized stocks with lower share prices.

The Forecasts recommends nine stocks trading at more than $100 per share. Two years ago, we recommended just one. Going forward, investors should get used to stocks with high prices because those lofty numbers have become more common. More than 2% of the stocks in our Quadrix research universe trade above $100 per share, well above the average of 1.2% since 2004. The average S&P 500 Index stock trades at $57 per share, up from $31 at the end of 2008. Blame much of that change on a decline in stock splits.

In 1997, 20% of S&P 500 Index components split their stock at least 5-for-4. That percentage has been trending mostly lower since, bottoming at less than 1% (one stock) in 2009 before rebounding to an anemic 2% (10 stocks) last year. Splits may pick up in the future, but given the lack of interest over the last three years — a period when the S&P 500 rose 58% — the golden age of stock splits may be behind us.

SCREEN OF THE MONTH: STOCKS ABOVE $100 PER SHARE
The Forecasts currently covers 12 A-rated stocks trading above $100 per share, equating to more than 7% of all monitored stocks. Stocks on buy lists are presented in bold.
12-Month
-- Growth --
Company (Price; Ticker)
Market
Cap
($Bil.)
Trailing
P/E
Ratio
Sales
(%)
EPS
(%)
12-Mo.
Total
Return
(%)
Quadrix
Overall
Score
Sector
Alliance Data
($127; ADS)
7.9
16
16
37
41
92
Technology
Apple ($560; AAPL)
529.4
16
63
96
59
99
Technology
AutoZone
($379; AZO)
15.3
18
8
26
34
86
Consumer
BlackRock
($189; BLK)
34.3
16
2
17
(1)
96
Financials
Caterpillar
($108; CAT)
72.2
14
41
80
1
95
Industrials
CF Industries
($181; CF)
12.0
8
54
182
32
100
Materials
Chevron ($103; CVX)
204.7
8
25
40
(1)
98
Energy
Google
($601; GOOG)
198.5
16
28
21
15
93
Technology
IBM ($200; IBM)
234.8
14
5
11
21
80
Technology
MasterCard
($430; MA)
54.6
23
21
33
59
89
Technology
Union Pacific
($111; UNP)
53.2
15
15
24
16
85
Industrials
Visa ($119; V)
82.1
23
14
30
54
90
Technology
Note: Quadrix scores are percentile ranks, with 100 the best.

Many of the highest-priced stocks look attractive, as shown in the table above. Stocks in our Quadrix universe that trade above $100 average Overall scores of 67. The table on page 5 lists A-rated stocks that trade at $100 per share or more. All nine of the recommended companies in the table earn solid Quadrix scores. All nine, including the three reviewed below, delivered excellent profit growth over the last year.

Alliance Data Systems ($127; ADS), with a Performance score of 87, has risen 23% so far this year and 41% over the last 12 months. The provider of credit-card marketing programs came by its share-price gains the old-fashioned way — strong operating results. In the March quarter, Alliance earned $2.38 per share excluding stock-based compensation and other noncash costs, up 17% and 9% above the consensus on 20% revenue growth. Without an increase in "phantom shares" the company never needs to economically settle, March-quarter earnings per share would have risen 27%.

The company boosted its profit guidance, now projecting operating-earnings growth of 22% this year. Alliance targets 2012 per-share-profit growth of 11%. Alliance's phantom shares, which stem from convertible hedges that should disappear in 2013 and 2014, may reduce annual per-share earnings by as much as $1.00. Alliance is a Focus List Buy and a Long-Term Buy.


Auto-parts retailer AutoZone ($379; AZO) has grown sales and per-share profits for 20 consecutive years, a feat managed by only five other companies in the S&P 500. That kind of consistency warrants a premium price. But AutoZone does not look particularly expensive, particularly relative to its growth potential. At 18 times trailing earnings, AutoZone trades roughly in line with the median automotive retailer.

The consensus projects per-share-profit growth of 20% in the fiscal year ending August 2012, 15% in fiscal 2013, and 14% annually over the next five years. Driving much of that growth is AutoZone's commercial business, which sells parts to professional mechanics. Commercial revenue has been rising at more than 20% annually as the company expands its market share. AutoZone is a Buy and a Long-Term Buy.


The trend toward noncash transactions should continue to drive growth at Visa ($119; V), the world's largest electronic payment network. In calendar 2011, Visa processed nearly 64 billion payments worldwide, up 10% from a year earlier. Visa's payment volumes rose 15% to $3.77 trillion, with 10% growth in the U.S. and 22% elsewhere in the world.

In 2011, foreign payments accounted for 46% of Visa's total volume, up from 38% in 2007. Going forward, the international business should account for an even larger slice of the business, as both developed and emerging markets build out their financial infrastructure. The consensus projects per-share-profit growth of 22% in the March quarter and 19% in the year ending September 2012. Visa, slated to declare March-quarter earnings May 2, is a Buy and a Long-Term Buy.

HIGH-PRICED STOCKS — THEN AND NOW
Historically, stocks trading above $100 per share have earned above-average Quadrix Overall, Momentum, and Quality scores, but have not always been compelling values. As of April 24, there were 94 such high-priced stocks in our research universe, well above normal levels. Six years ago, financials accounted for about half of the high-priced stocks. However, these days the group is much more diverse.
------------------------------------- Average For Stocks Trading Above $100 Per Share -------------------------------------
Stock-
Market
Value
($Bil.)
12-Month
---- Growth ----
12-Mo.
Total
Return
(%)
----------------------- Quadrix Scores -----------------------
Period
No. of
Stocks
Trailing
P/E Ratio
Sales
(%)
EPS
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Overall
Current
94
34.0
22
19
20
17
64
41
77
67
67
Largest sector weightings: Financials (24%), Industrials (14%), Consumer Discretionary (14%), Technology (14%), Energy (10%).
Two years ago
52
22.7
22
5
4
51
68
56
80
78
76
Largest sector weightings: Financials (29%), Discretionary (23%), Health Care (13%), Industrials (12%), Technology (8%).
Four years ago
73
30.6
22
22
21
19
69
46
82
73
78
Largest sector weightings: Financials (26%), Materials (18%), Industrials (18%), Consumer Discretionary (14%), Energy (10%).
Six years ago
66
21.7
24
20
(14)
34
62
57
73
67
72
Largest sector weightings: Financials (47%), Consumer Discretionary (12%), Energy (9%), Health Care (8%), Industrials (8%).
Eight years ago
29
23.1
21
15
9
38
60
63
67
59
68
Largest Sector Weightings: Financials (48%), Discretionary (17%), Industrials (14%), Consumer Staples (10%), Health Care (7%).
Notes: Averages exclude P/E ratios below 0 or above 75 and growth rates or returns above 100%.     Quadrix scores are percentile ranks.

 


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