Expensive is the new cheap

@lamonicabuzz March 7, 2012: 12:29 PM ET
Shares of companies that trade for more than $100 may seem like they cost too much. But investors have to focus on value, not price.

Shares of companies that trade for more than $100 may seem like they cost too much. But investors have to focus on value, not price.

NEW YORK (CNNMoney) -- One of the biggest mistakes an investor can make is getting all worked up about the share price of a stock.

Apple at $535? It must be ludicrously overvalued, right? Why pay more for one share of Apple (AAPL, Fortune 500) than it costs for a new iPad? But that's a fallacious argument. Apple is trading at just 12 times fiscal 2012 profit forecasts. That's very reasonable for a company growing as rapidly as Apple is.


There are plenty of other companies trading for more than $100 that may still be good bargains. Investors should not succumb to stock price sticker shock just because a company's share price is in the triple -- or in the case of Warren Buffett's Berkshire Hathaway (BRKA, Fortune 500), sextuple -- digits.

I did a quick stock screen using our trusty Baseline machine (thanks Thomson Reuters!) to find some "expensive" bargains.

In addition to Apple, the following stocks all have a price of at least $100 a share but are also trading at or less than the 13 times 2012 profit forecasts that is the average for the S&P 500: IBM (IBM, Fortune 500), Caterpillar (CAT, Fortune 500), Chevron (CVX, Fortune 500) and Goldman Sachs (GS, Fortune 500).

Investments to help you cash in on rising gas prices

And these stocks that all trade above the century mark are all valued at or below their projected earnings growth rate for the next five years: Priceline (PCLN), Visa (V, Fortune 500), MasterCard (MA, Fortune 500), Union Pacific (UNP, Fortune 500) and Google (GOOG, Fortune 500).

Of course, some stocks with seemingly gaudy share prices are in fact frothy.

I love Amazon (AMZN, Fortune 500) (stock price at about $185) as a service and realize its small cloud business is rapidly growing. But I still think that paying 140 times 2012 earnings forecasts for what's still essentially a low-margin retail wolf in technology sheep's clothing is a bit much.

Chipotle Mexican Grill (CMG) (stock price around $388) is another momentum darling that looks extremely rich. Chipotle shares trade at 45 times earnings estimates for 2012.

Sure, Chipotle is expected to grow at a much faster rate than other fast food restaurants. But it is getting arguably too much of a premium to the likes of Yum! Brands (YUM, Fortune 500) and former Chipotle parent McDonald's (MCD, Fortune 500).

But I can't stress enough that Amazon and Chipotle are not expensive because they trade above $100. If these companies did stock splits in order to reduce the cost of one share to double digit levels, they'd still be just as pricey when you look at their value versus their earnings.

Champions of the small investor

You have to pay attention to profits, not price. A stock can be expensive at below $10 a share and cheap at $500. There is perhaps no better example of this than the case of Apple and Nokia (NOK).

Shares of the Finnish smartphone maker don't cost a lot. They trade for about $5 a share. But sales are declining and earnings per share are expected to be more than cut in half in 2012. Nokia trades at nearly 30 times this year's profit forecasts.

So if you had $535 to invest, would you rather own 107 shares of Nokia or one share of Apple? I know what I'd do. Heck, you may be better off spending $5 on a foot-long at Subway than on a share of Nokia.

Best of StockTwits: Shares of Netflix (NFLX) rose on a Reuters report that said CEO Reed Hastings was talking to cable companies about a streaming partnership. And Pandora (P) plunged after missing forecasts.

ElliotTurn: $NFLX should be a force that disrupts cable companies, not one that works with them.

firstadopter: $NFLX is already regarded as public enemy #1 by cable guys for cord-cutting, why give your customers a taste of your enemy's brew. No sense.

I agree. This seems like a concession in some respects. If you can't beat 'em, join 'em.

idj: Why are so many people negative on $NFLX. Can't business models evolve and change. It happens all the time.

True. But the problem is when you change your business model and it results in alienating loyal subscribers and going from a company that was profitable to one that is hemorrhaging money.

All_InEquities: BMO capital says $P company's usage trends exceeded expectations $P benefits growth in mobile devices & ad share gains, Outperform rating.

cordial: Not really sure what people were expecting from $P. Have they never used Spotify before?

To be fair to Pandora, it is still growing rapidly. A 71% year-over-year increase in fourth quarter sales is obviously impressive and that's likely why BMO and some other brokerages are still defending it.

But as cordial notes -- and I did in today's Buzz video as well -- Pandora has so much competition. The top line growth is nice. But the first-quarter outlook is also below forecasts. And if Pandora can't make money, then investors will continue to give the stock a thumbs down.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

Index Last Change % Change
Dow 28,992.41 -227.57 -0.78%
Nasdaq 9,576.59 -174.38 -1.79%
S&P 500 3,337.75 -35.48 -1.05%
Treasuries 1.47 -0.05 -3.54%
Data as of 1:23am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
Find personalized rates:

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.