When a stock hits $1,000, embrace it.
That's one takeaway from tracking a small group of U.S. stocks that have traded at more than $1,000 (U.S.) in recent years: Despite the sticker shock, this exclusive club of four-digit stocks has performed very well, with gains that have walloped the S&P 500.
Stock in Amazon.com Inc., which closed at $1,006.73 on Friday, up $10.78 or 1.1 per cent from the previous day, will now expand this admittedly small sample. The pressure is on, given the impressive track record of four companies.
Since Google Inc.'s share price crossed the $1,000 threshold in October, 2013 (before the technology company split its stock in 2014), the shares have rallied 243 per cent. That is more than double the gain for the S&P 500 over the same period, including dividends.
Priceline Group Inc., an online travel company, rose to more than $1,000 a share in September, 2013. The shares now trade at $1,895.96 – up 89 per cent, versus a 53 per cent increase for the S&P 500 over the same period.
Seaboard Corp., a pork processor, hit $1,000 a share in late 2004. The shares now trade at $4,128, up 312 per cent or well above the 161 per cent gain for the S&P 500.
And lastly, consider Berkshire Hathaway Inc., Warren Buffett's holding company. I could only access data going back to 1987, when the shares traded at $2,950, but the trend is clear. The shares have since risen more than 84-fold, versus an 18-fold gain for the index.
In other words, if a $1,000 stock raises concerns that all of the gains have already appeared, push those concerns away. Based on these examples (the only ones I know of), breaking the four-digit barrier raises no obstacles to further gains.
Of course, the $1,000 price tag is a veneer. Plenty of other stocks would now be above $1,000 if they had not been split – a largely cosmetic process that, in the case of a two-for-one split, doubles the number of outstanding shares and cuts the share price in half.
Microsoft has split its stock nine times since 1983. Without the splits, the shares would be worth more than $20,000 each. Royal Bank of Canada shares would be worth about $1,500 (Canadian) each if you ignore four splits since the early 1980s.
Even Amazon.com split its stock three times in the late 1990s – an activity the company has evidently decided to curtail, given its refusal to split its stock since then.
Companies split their stocks to make them appear affordable to small investors who might prefer to buy in 100-share increments. Share splits also increase trading activity, which can be desirable. And splits may telegraph management confidence that more gains are coming.
Why do some companies avoid splits and let the price of their stocks rise into the stratosphere? For one thing, it provides an easy benchmark for everyone to see how far a company has progressed.
Beyond optics, leaving shares alone may provide some benefits too. If smaller investors are priced out, expensive stocks become the domain of sophisticated institutional investors. These well-heeled investors tend to take a buy-and-hold approach to investing that can give companies the luxury of pursuing long-term strategies.
Whatever the reasons, the point is whether Amazon.com's new $1,000 (U.S.) status should trigger bouts of dizziness on the part of investors.
The share price has risen more than 64,000 per cent since the company went public in 1997. The stock also has a sky-high valuation that appears to match the hefty price tag: It trades at 150 times estimated profit and 22 times book value.
These are good reasons to feel squeamish about the stock. But the share price itself offers no reason for alarm.
David Berman