The average price for S&P 500 companies hit a record high in April, even as the index itself traded at just 13.2 times projected 2012 earnings.
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|
|First Solar, Inc.||FSLR||$13.66||3.4|
|Western Digital Corp.||WDC||$34.66||4.5|
|Hartford Financial Services Gr||HIG||$17.07||4.7|
|Best Buy Co., Inc.||BBY||$18.02||5|
|Lincoln National Corporation||LNC||$20.56||5|
|Goodyear Tire & Rubber Company||GT||$10.04||5.1|
|Marathon Petroleum Corp||MPC||$34.92||5.1|
|R.R. Donnelley & Sons Company||RRD||$10.19||5.6|
Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.