Stocks for $100 (or More) With Room to Grow
Don't be put off by high share prices. Price and value are not the same.
By John F. Wasik
Buy high! No, we haven't lost our minds.
History shows that you can earn great returns buying stocks with sky-high share prices. Consider Berkshire Hathaway (symbol BRKA). If you had invested in Warren Buffett's company in September 1990, you would have paid an outlandish $5,900 per share. Today, the stock goes for almost $105,000, a nearly 18-fold increase.
The key is to avoid confusing a stock's price with its value. Value is determined by comparing a stock's price with such fundamental factors as a company's earnings, revenues or book value (assets minus liabilities). So if a stock trades at $10 and the underlying company has earned 20 cents a share, the stock sells at 50 times earnings. Compare that with a $100 stock that trades at ten times earnings of $10 per share. In terms of true value, the $100 stock is the cheaper of the two (although that doesn't necessarily mean it will perform better in the future).
Several factors not strictly related to a firm's results can influence its share price. One is how long a firm has been around. Another is the price at which a firm sets its initial offering. When Google went public in 2004 at the unusually high price of $85, its stock was already within hailing distance of triple digits.
The final -- and perhaps most important -- determinant of share price is a company's attitude toward stock splits. A split changes none of a stock's key measures of value. But many companies believe investors will find their stocks more appealing if the absolute price remains low, so they regularly split their stocks. By contrast, Berkshire's Class A shares reached six digits not only because of the company's successful record but also because Buffett despised splits (he split Berkshire's Class B shares early this year to facilitate the purchase of Burlington Northern).
As of June 4, 39 stocks trading in the U.S. fetched $100 or more. Below we focus on five with bright prospects. (All share prices are as of that day's close.)
Google (GOOG) $499
Google's once-unstoppable shares are in retreat. The stock's price is one-third below its record high, set in November 2007. It is having a particularly rough 2010, dropping 20% through early June because of concerns about slowing growth and Google's decision to effectively shutter its search engine in China.
The good news is that Google's valuation has fallen to a level that would have seemed unimaginable a few years ago. It sells for 18 times estimated 2010 earnings of $27.82 per share. As recently as 2007, Google's average price-earnings ratio for the year was over 40.
And although Google's growth is clearly slowing (not surprising, given that revenues hit nearly $24 billion last year), the company has a firm grip on its primary market and plenty of opportunities to expand. "Paid search" -- in which Web-site owners pay a fee to have their sites receive top placement in search results -- account for nearly all of Google's revenues. This segment should continue to grow as advertisers continue to flee to the Internet. The Mountain View, Cal., company is also working on its own PC operating system -- a direct challenge to Microsoft's Windows empire -- and is developing an Android-based tablet computer to rival Apple's iPad.
Google has a pristine balance sheet: no debt and cash of $26.5 billion. "Google is a core holding trading at a compelling valuation," says analyst Scott Kessler, of Standard & Poor's. S&P's 12-month target price for Google is $725.
Apple (AAPL) $256
Until the current correction got under way, Apple was the face of the bull market. The stock soared from $78 in early 2009 to a peak of $272 in April, adding more than $150 billion in market value.
With its iPod, iPhone and iPad, Apple is not just a technological innovator but a cultural phenomenon. The Cupertino, Cal., firm shipped almost nine million iPhones and three million Macintosh computers in the quarter that ended March 27, and it sold two million iPads within two months of the device's release on April 3. Although the iPad faces robust competition, it looks like a game changer. It's not merely a user-friendly tool for providing information; it delivers with elan. As for the iPhone, Apple recently unveiled an upgraded model with a variety of new features.
Apple shares are not outrageously expensive. That's because the appreciation has been commensurate with profit growth. Apple sells for 19 times estimated earnings of $13.38 per share for the year that ends this September. Like Google, Apple has a fortress-like balance sheet. The company holds $23 billion in cash and has no debt.
AutoZone (AZO) $189
From the flashy to the mundane, we move to AutoZone, the nation's largest retailer of auto parts. The Memphis-based company operates some 4,500 stores in the U some 4,500 stores in the U.S. and Mexico. That number is up 50% from ten years ago, providing one clue how AutoZone has been able to boost profits by a factor of four since 2001.
A couple of trends put AutoZone shareholders in the driver's seat. For starters, baby-boomers love old cars. That's a huge market -- mostly men who relish the opportunity to fix up a classic Camaro or Thunderbird. A high unemployment rate also bodes well for AutoZone because people without jobs or worried about losing their jobs hang on to cars longer. That means drivers need to spend more to keep their vehicles going.
AutoZone has plenty of room to grow in Mexico, where it has 212 stores. Executives are looking south of the border to help achieve their goal of increasing the number of stores by 4% annually. The company also hopes to boost sales to professional repair shops, where it has only 1.5% of the market. Selling to shops isn't as profitable as serving gearheads. But because that business doesn't involve building new stores, it is an extra source of revenue with few additional costs. At $189, AutoZone shares sell at 13 times estimated earnings of $14.61 per share for the year that ends this August.
Washington Post Co. (WPO) $450
The latest circulation figures for the Washington Post, the flagship of the Washington Post Co., paint a grim picture. For the six-month period that ended March 31, weekday circulation fell 13.1%, to an average of 578,500 (compared with a peak of 830,000 in 1994), while Sunday sales dropped 8.2%, to about 800,000 (compared with a high-water mark of 1.1 million in 1992). The company also recently announced that it has put its troubled Newsweek magazine on the block. Meanwhile, the stock is down 55% from its 2004 high.
Look beyond the albatross of dead-tree media, though, and you find the company's crown jewel: Kaplan Inc., which started as a provider of test-preparation services and is now one of the world's fastest-growing for-profit education companies. Kaplan's annual revenues have grown at a compounded rate of 27% over the past ten years, to $2.6 billion. That represents 58% of the company's sales.
The stock sells at 22 times estimated 2010 earnings of $20.58 per share, a big jump from the depressed levels of 2008 and 2009. The P/E may seem high, but it's reasonable if you view the Post Co. as primarily a provider of education services rather than as a traditional media concern.
Wesco Financial Corp. (WSC) $342
Charlie Munger, 86, may not get as much attention as his younger sidekick, Warren Buffett, who turns 80 in August. But Munger is no slouch when it comes to business matters. In addition to serving as vice-chairman of Berkshire Hathaway, he is chairman, president and chief executive of Wesco Financial Corp., a Pasadena, Cal.-based mini-conglomerate with interests in insurance, furniture rental and steel warehousing.
Wesco is a kind of low-rent version of Berkshire Hathaway, which owns 80% of the company. Munger admitted as much in Wesco's 2009 annual report, in which he said Wesco was "not an equally-good-but-smaller version of Berkshire Hathaway." But the company's close ties to Berkshire and its hefty cash position, $2.6 billion at last report, give it an edge in the insurance business. Wesco's shares are also cheaper than Berkshire's. The stock trades for just a shade above book value, the preferred measure of value for insurance companies. Berkshire trades at about 1.2 times book value. Morningstar estimates Wesco's fair value at $455 per share.