More on Low-Priced vs. High-Priced Stocks
“SkyGuy” left this comment on my post about high-priced stocks:
I disagree about low-priced stocks! $5 stocks have the highest profit potential of any stock out there. The reason is that this price level is where small companies make the jump to big companies. It’s the best part of the growth curve in terms of revenue and profit acceleration.
If Google brings in $4 bil of revenues this year, how much longer can it continue to double its revenues? Not much. OTOH, a small restaurant chain with a $4 stock with 30 stores can easily double rev’s by franchising another 30 stores.
There are 40 stocks in the $1.50 to $7 range that have outperformed Google this year.
This comment is a perfect example of what I’m talking about. He’s confusing market cap with price per share. Note that he says small companies not low-priced stocks in the second paragraph. Price per share has absolutely nothing to do with market cap! Google could do a 100-for-1 split but it would still have the same market cap and still be subject to the law of large numbers that SkyGuy rightly points out.
My point here and in the other post is that you can’t (shouldn’t) make a judgment about a stock based solely on its price per share. That in and of itself tells you nothing about the company.
This post has 6 comments
November 3rd, 2005
Mike,
Aww yes, you are very correct. I often tell my colleagues to think of GOOG as a $35 stock heading to $45 like EBAY. Makes a bit more sense. However, there is one LARGE aspect that GOOG has, and that is OPTIONS!!!!! Good trend traders are usually able to make 50-100% per week just by the options, and making a nice straddle before earnings has not failed yet! Due to its high price, the options will fluctuate so much that it is quite ridiculous and dangerous.
November 3rd, 2005
I think if you focus on profitability, growth and valuation, you’ll survive any market.
When readers forget this, they suffer monstruous cataclysms.
I personally eschew stocks under $10 — they’re down there for a reason.
In other words, if you roam around garbage cans, you’ll probably catch something deadly. Keep it clean…
We’re conditioned to buy low and sell high - I like to buy high and sell much higher.
Case in point - CUTR - my biggest winner this year (went from $20 - $33)……..
keep up the great work mike…
November 4th, 2005
Mike,
I’m not confusing price and market cap. I’m merely guilty of using imprecise language so I understand why you might reach that conclusion. Perhaps I should have said, “Low price stocks tend to be small caps and high price stocks tend to be large caps. Smallcaps have more potential for large percentage gains than large caps do.”
Beyond that, there is a reason price matters. It is well known that many mutual funds and institutions have minimum price per share policies. They won’t consider buying a stock unless it’s at least $5 per share. If you can find a $4 small cap with a good story and institutions start to accumulate, the shares will outperform as mutual funds and pension systems add the shares to their portfolios.
In theory, you are correct. However, after watching charts for years, I know in the real world it’s a lot more common for $4 to run up to $8 than it is for $300 to go to $600.
November 4th, 2005
SkyGuy,
I’m sure it’s much more common for a $4 stock to sdouble than a $300 stock because most stocks split well before they get anywhere near $300. But what about stocks that double from 10 or 20 or 30 or 40? I think another reason people are so bent on finding low-priced stocks is because they look back at the chart of MSFT and say “hmm, Microsoft was trading under a dollar back in the 80’s so if I want to find the next MSFT I’d better find a penny stock”. The problem is that MSFT never traded that low in reality — it’s chart has been modified by the smoke and mirrors of stock splits. I bet that if you backed out all the splits of all stocks you’d see a hell of a lot more stocks doubling from 300 and higher.
Anyway, I understand your point but I don’t fully agree with the way you’re stating it. I usually tend to avoid investing in large caps b/c I’d rather be in smaller companies that I feel can grow much faster. But still my point is that you can’t tell that by looking at the stock price.
November 4th, 2005
I think a lot of traders’ preference for low priced stocks is an ego thing: they feel bigger buying 2000 shares of a $5 stock than 30 shares of GOOG.
November 6th, 2005
SkyGuy said “However, after watching charts for years, I know in the real world it’s a lot more common for $4 to run up to $8 than it is for $300 to go to $600.”
I’m sure he just ran out of typing space, but the corralary to that sentence should also be stated:
“I also know in the real world it’s a lot more common for a $4 stock to run down to $0.40 than it is for a $300 stock to run down to $30″
I think what Mike was saying is extremely valid–that share price DOES matter, but that doesn’t mean it SHOULD matter.