AAII Journal Editor
Stock Splits vs. Stock Dividends
Our financial statement FAQ explains the difference.
Will the Real P/E Please Stand Up?
Price-earnings ratios are not all the same.
AAII Discussion Boards
Is there a limit to what you will pay for a stock?
This week’s AAII Sentiment Survey results:
Bullish: 30.5%, up 6.9 points
Neutral: 30.9%, up 0.4 points
Bearish: 38.7%, down 7.3 points
May 17, 2012
May 10, 2012
May 3, 2012
April 26, 2012
April 19, 2012
April 12, 2012
April 5, 2012
March 29, 2012
March 22, 2012
March 15, 2012
March 8, 2012
March 1, 2012
February 23, 2012
February 16, 2012
February 9, 2012
February 2, 2012
January 26, 2012
January 19, 2012
January 12, 2012
January 5, 2012
December 29, 2011
December 22, 2011
December 15, 2011
December 8, 2011
November 30, 2011
November 24, 2011
November 17, 2011
November 10, 2011
November 3, 2011
October 27, 2011
October 20, 2011
October 13, 2011
October 6, 2011
September 29, 2011
September 22, 2011
September 15, 2011
September 8, 2011
September 1, 2011
August 25, 2011
August 18, 2011
August 11, 2011
August 4, 2011
July 28, 2011
July 21, 2011
July 14, 2011
July 7, 2011
June 30, 2011
June 23, 2011
June 16, 2011
June 9, 2011
June 2, 2011
May 19, 2011
May 12, 2011
May 05, 2011
April 28, 2011
April 21, 2011
April 14, 2011
April 07, 2011
March 31, 2011
March 24, 2011
March 17, 2011
March 10, 2011
March 03, 2011
S&P 500 stocks traded at an average price of $58.52 on April 30, 2012, according to the current issue of Bloomberg Businessweek. This was 9.1% higher than the average price of $53.66 registered when the large-cap index hit its all-time high of 1,565.15 in October 2007. As of May 15, 2012, 48 S&P 500 stocks commanded share prices in excess of $100—the largest number since at least 1990. (Bloomberg’s data goes back to 1990.)
Behind the higher share prices is a dearth of stock splits. To date, just four companies have split their shares this year. Last year, only 16 companies split their stocks. In comparison, an average of 35 companies split their stock each year between 2004 and 2007, according to the article.
The reasons are not completely clear as to why companies are not splitting their shares. One reason may be fear about another downturn in the markets. Companies don’t want their stocks falling below certain price levels. (A share price below $5 can cause a stock to be delisted from the major exchanges.) Some CEOs may see high share prices as a sign of success. Yet another possibility is that shares of Apple (AAPL) trading in excess of $600 last month signals that triple-digit stock prices are not a deterrent to buyers. Most likely, a combination of factors, including these, are at play.
It is very important to understand, however, that price and valuation are two very different things. It is human nature to view Apple’s price of $565.32 as high and Micron Technology’s (MU) price of $5.74 as low, but neither number tells you anything about the stocks’ valuations. Rather, the tendency to view a stock as cheap or expensive based on price alone is a behavioral error known as anchoring. We base our opinion of the price on a mental benchmark, even though the price reveals nothing about what a stock is actually worth.
This is why it is critical to focus on valuation and not price. A stock can be cheap at $500 if its price-earnings multiple is low and a stock can be expensive at $5 if its price-earnings multiple is high. The tables below put this in more concrete terms. Table 1 shows the 10 highest-priced stocks in the S&P 500. Table 2 shows the stocks with the highest price-earnings ratios based on projected 2012 earnings. As you look at the two tables, ask yourself which truly has the most expensive stocks.
|Table 1. S&P 500 Stocks Sorted by Price|
|Intuitive Surgical, Inc.||ISRG||$511.24||34.7|
|Chipotle Mexican Grill, Inc.||CMG||$392.13||44.1|
|Washington Post Company||WPO||$333.00||16.5|
|CME Group, Inc.||CME||$258.00||15.7|
|Table 2. S&P 500 Stocks Sorted by Forward P/E|
|WPX Energy Inc.||WPX||$15.37||189.8|
|Motorola Mobility Holdings, Inc.||MMI||$39.20||95.1|
|Host Hotels and Resorts, Inc.||HST||$14.11||77.5|
|Cabot Oil & Gas Corporation||COG||$34.27||71.0|
|Boston Properties, Inc.||BXP||$100.87||68.9|
|Range Resources, Corp.||RRC||$61.46||67.7|
|Crown Castle International, Corp.||CCI||$52.86||65.4|
Invest Based on Dollar Amounts, Not Share Counts
When deciding how many shares to buy, think in terms of dollars invested, not the number of shares purchased. It might be mentally satisfying to own nice, orderly blocks of 100 shares, but doing so will cause your allocation to be askew. Purchasing 100 shares of a stock trading at $50 requires a $5,000 investment; purchasing 100 shares of a stock trading at $20 requires a $2,000 investment. As you can see, investing solely on share count can cause you to invest 150% more in the stock with the higher price.
A better strategy is to determine the dollar amount you want to invest and then divide that by the current share price. It will make no difference to your broker if you by 73, 169 or 242 shares—your commission will be the same. Investing by dollar amount, instead of share count, however, will keep you from being over- or under-allocated to specific stocks, thereby lowering your portfolio’s risk.
More on AAII.com
The Week Ahead
The U.S. financial markets will be closed on Monday, May 28, in observance of Memorial Day.
The only S&P 500 members scheduled to report earnings next week are Joy Global (JOY) and SAIC (SAI), both of which will announce results on Thursday.
The week’s first economic reports will be the Conference Board’s May consumer confidence survey and the March S&P Case-Shiller housing price index, both of which will be published on Tuesday. Wednesday will feature April pending home sales. The May ADP Employment Report, the May Chicago PMI and the first revision to first-quarter GDP will be released on Thursday. Friday will feature the May jobs report—including the unemployment rate and the change in nonfarm payrolls—plus the May ISM manufacturing survey, April personal income and spending and April construction spending.
Three Federal Reserve officials will speak publicly on Wednesday: New York President William Dudley, Dallas President Richard Fisher and Boston President Eric Rosengren. Cleveland President Sandra Pianalto will speak publicly on Thursday.
AAII Sentiment Survey
Bullish sentiment rebounded as bearish sentiment pulled back from unusually high levels in the latest AAII Sentiment Survey.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 6.9 percentage points to 30.5%. This is the eighth consecutive week that bullish sentiment has been below its historical average of 39%.
Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, edged up 0.4 percentage points to 30.9%. The historical average is 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 7.3 percentage points to 38.7%. Even with the drop, bearish sentiment is above its historical average of 30% for the sixth time in seven weeks.
The level of pessimism declined from the unusually high readings registered during the last two weeks as the market's downside volatility paused. Nonetheless, individual investors remain concerned about the short-term direction of stock prices. Europe and the pace of U.S. economic growth remain key concerns.
This week’s special question asked AAII members which sectors or industries they like right now. Energy was named by the largest number of respondents, followed by technology, health care, and consumer staples. When the same question was asked last February, members said they liked energy, technology and real estate [real estate investment trusts (REITs) and home building stocks].