Three High-Priced Values
The relationship of share price to value is worth pondering because many more stocks than usual seem to be selling at high absolute prices.
That's probably the result of the long bull market that began in late 2002, as well as an increased willingness on the part of company managements to eschew splits and let their stocks appreciate to stratospheric levels. One notable example: The brass at Google has made no move to split the stock despite its steady ascendance in a bit more than three years from around $100 a share to its November 20 close of $648.54.
Screening on Value Line's Web site, we found 116 stocks selling for at least $100 per share. The list ranged from household names such as Federal Express, IBM and Las Vegas Sands to such relative anonymities as First National Bank Alaska and Crowley Maritime.
Regardless of whether they've split their shares in recent years, it's hard to imagine that large, liquid household names such as IBM and FedEx are either vastly undervalued or overpriced. Stock splits, after all, are economically meaningless events that do nothing to enhance shareholder value. And companies like these are widely followed by Wall Street, so the shares tend to be fairly valued in the marketplace.
The more intriguing high-priced stocks are those that are not closely followed by Wall Street simply because the shares fetch a high price. Brokers make less money trading high-priced shares because they're usually compensated by volume of shares transacted. Retail investors tend to shy away from expensive stocks, regardless of valuation. That reduces trading volume and, hence, Wall Street's interest.
Here are three particularly intriguing high-priced stocks that offer good value. All are run by honest executives who know how to allocate capital and decline to play the Wall Street game of splitting share prices to attract more retail investors.
The first -- and most obvious -- is Warren Buffett's Berkshire Hathaway. The "A" class shares (symbol BRK-A) closed November 20 at an off-the-charts $136,500 per share; the "B" tracking stocks (BRK-B) can be had for a mere $4,551.50. Berkshire numbers are in a class of their own. Partly boosted by gains from selling shares of PetroChina, Berkshire's third-quarter earnings jumped 64%, to $2,942 per share.
The story of Berkshire, which owns Geico and General Re, among other companies, and holds massive stakes in Coca-Cola and American Express, is well known. Less well known is Markel Corp. (MKL), a Richmond, Va.,-based insurance outfit that also owes its long-term success largely to astute stock-picking. Markel closed at $464.30, down 2% for the day.
In this case, the money manager is Markel's chief investment officer, Thomas Gayner. From 1997 through 2006, Markel's stockholdings returned in excess of 14% annualized, an average of six percentage points per year ahead of Standard & Poors 500-stock index.
Over 20 years, Markel's book value (assets minus liabilities) per share grew an astounding 23% annualized. Markel's latest filing with the SEC shows that General Electric (GE) and Diageo (DEO) are two of its largest holdings.
The final stock of the three is Alleghany Corp. (Y), controlled by the low-profile Kirby family. Shares of New York City-based Alleghany closed at $375.50, down 3.3%.
Like Berkshire Hathaway and Markel, Alleghany skillfully invests the enormous cash float from selling insurance premiums. Alleghany's SEC filings reveal a $400 million investment in Burlington Northern Santa Fe (BNI) and large stakes in Apache (APA) and Procter & Gamble (PG).
You can think of Berkshire, Markel and Alleghany as a little like well run mutual funds. But for people who invest in taxable accounts, these diversified financial companies offer a big advantage over funds.
Funds must distribute net realized taxable gains to shareholders. They will be distributing billions of dollars in these gains to millions of shareholders come December. Structured as holding companies, corporations like Berkshire Hathaway and Alleghany are not required to distribute capital gains.