Stock Picking on a Budget: Don't Let Sticker Shock Scare You Away

by: SA Editor Rocco Pendola

Investors, particularly ones on a budget, often buy into the notion that they have no business buying stocks with high share prices. On the surface, this intuition appears sound. If you have $500 or $1,000 to put into a stock, would it not be better to grab 500 or 1,000 shares of a $1.00 stock with so much room to run instead of buying just 1.67 or 3.33 shares of a $300 stock? Even with $10,000, the prospects of owning a whopping 10,000 shares of the $1.00 stock holds more allure than sitting on a mere 33.33 shares of the $300 stock.

Intuition often runs counter to reality. While low-priced stocks sometimes make people rich quickly, more often than not they stay "cheap" because the market priced them low for a reason. The "expensive" stocks, on the other hand, tend to (though not all the time) trade for a premium for good reason.

In this article, I compare the performance of stocks with lofty prices per share against stocks in the same or similar industries with attractively low share prices.


Chipotle Mexican Grill (NYSE:CMG): To many people, Chipotle presents as the stock that's always too late to get into. If you buy it on the way up, logic dictates you'll have chased a high-flyer that has seen its best days. As Chipotle continues to impress, however, investors have been able to justify its somewhat hefty P/E of 44 relative to its $246.98 price tag, as of Wednesday's close. Remember, a high P/E does not necessarily mean overvalued; rather, it means that investors are okay with paying a premium for impressive anticipated earnings growth. So far, CMG has yet to disappoint. Had you invested $10,000 in CMG one year ago, your 86.75 shares would be worth $21,426 today, good for a 114.26 percent return.

Panera Bread (NASDAQ:PNRA): Through an investment in the lower-priced, but still relatively "expensive" Panera Bread, you can enter the higher-end fast food restaurant space. PNRA sports a similar valuation to CMG with a P/E ratio of 33 in relation to its $119.04 stock price. A $10,000 investment in PNRA one year ago would have snagged you a good-sized 126.84 share lot that would be worth $15,099 today, a 50.99 percent return.

McDonald's (NYSE:MCD). When valuations and concerns over too-good-to-be true growth prospects spook investors, they often head for the shelter of tried and true, mountains of stability, such as "safe" stocks that pay dividends like McDonald's. If you opted for MCD one year ago, your $10,000 would have turned into $11,421 for a 14.21 percent return, which is nice, but falls short of CMG- and PNRA-like performance, even without the magic of dividend reinvestment.

Internet/Travel (NASDAQ:PCLN): Talk about sticker shock. stock is akin to the high-end suit shop you walk in and immediately out of after observing price tags. Today, PCLN's $466.26 price per share would only permit an investor with $10,000 to spend 21.45 shares. One year ago, the same amount of cash could have netted you 40.91 shares when PCLN traded for the paltry sum of $244.41. Over the course of the last year, shares have returned 90.77 percent turning ten grand into $19,077.

Expedia (NASDAQ:EXPE): Instead of splurging on PCLN, you could have turned to a stock that pays a modest dividend and would have made you feel like a high-roller; one year ago, $10,000 would have secured you 436.49 shares of EXPE. Even with dividends reinvested, your EXPE investment would have lost 4.86 percent over the last year, morphing into $9,514.

Internet Search

Google (NASDAQ:GOOG): If defines sticker shock, Google implies a ticket to a $10,000-a-plate Obama fundraiser. Thanks to GOOG's recent descent, the year-ago numbers don't look as good for Google as they do the search engine's high-flying counterparts. Still, the 18.21 shares of GOOG you could have purchased one year ago with $10,000 would be worth $10,604 today, good for a 6.04 percent return. Had you unloaded before the last month's decline took hold in mid-February, say around the $620.00 mark, your 10K investment in GOOG would have increased to $11,290.

Yahoo! (NASDAQ:YHOO): If you believe in the Internet search space, but got scared away by GOOG's price, Yahoo! might have been your second choice. There's a reason, however, why it's number two. While a $10,000 investment in YHOO one year ago would have shown as 623.83 shares in your account, they would only be worth $10,062 today, for a weakish 0.62 percent return.


Washington Post Co. (WPO): The Washington Post Company runs more than a newspaper. WPO also operates television stations and provides a wide variety of educational services, domestically and abroad. The shares come in at a heady $437.42 a pop, as of Wednesday's close. The company also pays a dividend of $9.40 a share, for a 2.2 percent yield. Had you invested $10,000 in WPO one year ago, you would have had 22.25 shares at the outset. Even with dividends reinvested, you would have still lost money, on paper, as of today, generating a negative return of -0.60 percent. Your $10,000 would be worth $9,940.

New York Times Co. (NYSE:NYT): Had you opted for a less "expensive," pure play on the newspaper and online media business, you might have turned your attention to the New York Times Company. An investment in NYT, however, would have performed much worse than one in WPO over the last year. On March 23 of 2010, $10,000 invested in NYT would have secured you 891.27 shares. Today, with NYT trading at $9.27 -- down almost $2.00 year-over-year -- that $10,000 would have drooped to just $8,262, representing a -17.38 percent return.

Apollo Group (NASDAQ:APOL): The Apollo Group represents a pure, for-profit education play, you could have made instead of paying a premium for WPO. If you went the APOL route, you'd have less money to pay off your high-interest, private student loans. Ten thousand bucks one year ago would have purchased an impressive 156.32 shares of APOL. The return does not look quite as impressive -- that $10,000 would have decreased by 33.84 percent over the last year, leaving you with $6,616.


Certainly, you could search and find investments that outperformed sticker shock stocks like CMG, PNRA, PCLN, GOOG, and WPO. But that's not the point. Despite my disdain for the use of quotes in prose, it works here. Just because a stock is "expensive" doesn't mean it costs too much. And all stocks with low sticker prices relative to their peers do not represent "cheap" value plays on the cusp of an amazing turnaround. I have to remind myself almost daily -- I am better off dollar cost averaging into a "high-priced" stock like GOOG for 0.090 shares on $50 a week than I am playing the slots with 5,000 shares worth of the week's pump-and-dump penny stock special.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.