When is a $500 stock cheaper than an $82 stock?
This month Apple’s stock closed above $500 per share and CNBC announced its “market cap”, or total value, had reached $475 billion. That number rang a bell, and sure enough, that was the peak in market value for Cisco Systems in early 2000.
The following table shows that the coincidences end there. Looking at the numbers you can see that Cisco at $82 was wildly more expensive than Apple at $500.
|Stock||Date||Market Value||Stock Price||Earnings/Profits|
|Cisco Systems||Mar 2000||$475 Billion||$82||$2 Billion|
|Apple||Feb 2012||$475 Billion||$500||$33 Billion|
The reason is in the last column. Cisco earned just over $2 billion in 2000, while Apple earned $33 billion last year. So Cisco sold for over 200 times its earnings while Apple is selling at less than 15 times.
So when you hear that Apple is “expensive” (usually just referring to the price) don’t forget the earning power that supports that price. High prices aren’t that risky if they are well supported by the business.
One more point about triple digit stock prices. They can deceive us into thinking that stock moves are bigger than they really are. If Apple had 10 billion shares outstanding (instead of .95 billion) the stock would trade at $50 and the most recent move would have started at $38 instead of $380. Which sounds like more fun? A $12 move or a $120 move?
February is turning out to be a very good month for our portfolios and the market. However, the market has rallied for nearly ten weeks without much of a break, let alone a correction. A correction is over-due, but everyone we know is hoping for lower prices which would allow them to put more cash into stocks.
The market tends not to give investors what they are hoping for, so whatever correction develops over the next few days or weeks will probably be shallow, or short, or both.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.