Don’t Judge a Stock by its Share Price
Some people incorrectly assume that a stock with a low dollar price is cheap, while another one with a higher price is expensive. In fact, a stock’s price says very little about the stock’s value. Even more important, it says nothing at all about whether that stock is headed, higher or lower.
For example, Company A has a $100 billion market capitalization and has 10 billion shares, while Company B has a $1 billion market capitalization and 100 million shares, both companies will have a share price of $10. But company A is worth 100 times more than Company B.
A stock with a $100 share price may seem very expensive when compared to a stock with a $5 trading price. Some might think that the $5 stock has a better chance of doubling than the $100 stock does. However, the $5 stock could be considered overvalued, and the $100 stock could be undervalued. The opposite also could be true as well, but the share price alone is no sign of value.
Below is an example; CSL and ResMed are both Australian listed companies traded on the ASX, both offering exposure to Healthcare.
In early June, CSL was trading at $288.76 per share, and RMD was trading at $23.59 per share, therefore, RMD may seem like a better share based on its price and that you would get more quantity for your purchase.
As can be seen in the above table, CSL may look like the “expensive stock” based on the share price only. But when looking at the company’s fundamentals, both stocks have performed very similar over this period.
The main take away here is to not make the mistake of looking at the share price only, it is important to understand the company itself and what you are buying into, what are the companies goals, fundamentals, intrinsic value, to name a few. As Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
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