Google’s sky-high share prices are like tickets to an exclusive club, where membership has its advantages.CHRIS HELGREN/Reuters
If Google Inc. shares look too steep after they broke the $1,000 (U.S.) barrier on Friday, consider it a good thing. Sky-high share prices are like tickets to an exclusive club, where membership has its advantages.
There are just three other U.S. stocks (and no Canadian stocks) that reside in quadruple-digit territory: Berkshire Hathaway Inc., the holding company steered by legendary investor Warren Buffett; Seaboard Corp., the pork processor; and Priceline.com Inc., the online travel company.
Google, which makes most of its money from online advertising, joined the club after delivering stellar quarterly results on Thursday evening, sending the shares to $1,011.41 (U.S.) the next day, up $122.61 or 13.8 per cent.
Despite their different underlying businesses, these stocks share one key characteristic: They form a small but dazzling group of investments with outstanding long-term returns, where a hefty share price is no impediment to future performance.
For sure, there would be plenty of other names on this list if companies did not split their shares whenever they moved into lofty territory. Royal Bank of Canada shares would be worth about $1,100 (Canadian) if the bank hadn't split its shares four times over the past 30 years and Microsoft Corp. shares would be worth about $10,000 (U.S.).
But that's what makes the quadruple-digit club so special: These companies have refused to cater to the limited pocketbooks of individual investors who might think twice about buying, say, five shares at $1,000-a-pop.
Instead, these companies have allowed their share prices to rise unhindered, signalling that they stand with sophisticated investors for whom a $1,000 share price is no impediment – and "sophisticated" largely means the institutional money of pension funds, mutual funds, hedge funds and endowments.
This so-called smart money, backed by full-time resources and professional designations, tend to be better informed than individual investors about a company, and therefore less likely to jump in and out of a stock because of rumours and market jitters.
In fact, they are far more likely to take advantage of a stock when its price appears to diverge from the company's underlying fundamentals.
As a result, these investors offer stability, which is why strong institutional ownership is a prized feature for a stock – yes, even when you're an individual investor. At Google, institutions own nearly 90 per cent of outstanding shares, versus about 50 per cent at Royal Bank, according to Bloomberg.
Hitting $1,000 doesn't hurt performance, that's for sure. Berkshire Hathaway has risen 17 per cent a year (for data going back to 1987, when the shares traded for $2,950), crushing the S&P 500.
Seaboard his risen 12.5 per cent a year since it hit $1,000 in 2004, or more than double the gain for the benchmark index. And Priceline has risen 5.4 per cent since crossing the threshold a mere month ago, or more than four times the gain for the index .
If Google follows this trend, its quadruple-digit status should be a springboard for further gains, even after its shares have surged 1,000 per cent since their debut in 2004. Already, analysts have jacked up their target prices on the stock. At Credit Suisse, the new target is $1,200, up $200. At Deutsche Bank, the target is $1,220, up $250. Okay, rising another tenfold over the next decade is too much to expect for a company that is now valued at $337-billion, closing in on Apple Inc. and Exxon Mobil Corp., and dwarfing the likes of Priceline and Seaboard. But if the question is whether Google can keep delivering impressive returns to investors who aren't scared off by the $1,000 price tag, the answer is clear: A stock that appears inaccessible to individual investors has one more thing going for it.
David Berman