Stock-market indexes fell in the final months of 2018 before jumping right back into rally mode to start the new year. The S&P 500 has more than doubled in the past decade; with growth like that in the rearview mirror, it can feel like the best deals have already been taken.
Meanwhile, companies like Amazon.com (NASDAQ:AMZN) and Google parent Alphabet have seen their share prices rise to over $1,000 each, a figure that’s out of reach for many investors who hope to accumulate multiple shares of attractive businesses to hold for the long term. The good news is that there are quality buy-candidate stocks out there priced below $50 a share…
What’s cheap and what’s not
Before we get to buying stocks, it’s important to first understand that the per-share price has absolutely zero bearing on the value of the underlying business. Put another way: A $30 stock is not cheaper than a $40 stock.
Stocks are priced on a per-share basis, and the number of available shares varies wildly between companies — or even with respect to the same company over different time periods. Think of a pizza that’s been cut just once, down the middle: Each half constitutes one slice, or “share,” of the whole. Cut that same pizza once again, and you now have four shares. The number of slices has increased, and the amount of pizza per slice has dropped, but the total amount of pizza hasn’t changed. A whole pizza sliced into four slices isn’t cheaper than a same-size pizza that’s been cut into two pieces — it’s the same amount in either case. You’ll just pay less per slice.
The same process applies to stocks, whose prices can be manipulated by companies performing a stock split (a 2-for-1 split doubles the share count and cuts the per-share price in half).
So when evaluating the value of a company, it’s helpful to look at market capitalization rather than the share price. To calculate market cap, you multiply the per-share price by the number of shares outstanding. That’s how you can tell that auto parts retailer AutoZone (NYSE:AZO), priced at $995 per share as of this writing but with a market cap of $26 billion, is far cheaper than consumer-products giant Procter & Gamble, priced at $105 per share but with a market cap of over $250 billion.
It’s more useful to compare the value of similar companies using valuation metrics like price-to earnings ratios. The P/E captures the price of a stock in relation to its earnings, and the figure can tell you if a company is getting cheaper when compared to industry peers, the broader market, and its past valuations. AutoZone could be purchased in early 2019 for about 19 times the past year’s worth of profits; that P/E ratio of 19 valued it close to peer O’Reilly Auto Parts, and just slightly cheaper than the broader stock market. Valuations, like stock prices, change daily, but those comparisons can always help you judge a company’s worth at a given time.
Prices still matter
Per-share prices still play an important role in investing decisions, and there are legitimate reasons to hunt for lower-priced stocks. After all, it takes less cash today to buy a few shares of P&G than of AutoZone. You have more flexibility with lower-priced stocks, too, in that you can more easily trim or add to your holdings. These liquidity benefits are a key reason that companies perform stock splits in the first place.
So, with that share-price caveat in mind, let’s look at some attractive businesses with share prices that have held below $50 through the first quarter of 2019…
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