Value is determined by comparing a stock's price to such fundamental measures as earnings, revenue or book value (assets minus liabilities). So if a stock trades at $10 and the underlying company has earned 20 cents a share, the stock sells at 50 times earnings. Compare that with a $100 stock that trades at 10 times earnings of $10 per share.
In terms of true value, the $100 stock is the cheaper of the two (although that doesn't necessarily mean it will perform better in the future).
History shows that you can earn great returns even if you buy a stock with a sky-high price. Consider Berkshire Hathaway (BRK.A, news, msgs). If you had invested in Warren Buffett's company in September 1990, you would have paid an outlandish $5,900 per share. Today, the stock goes for $109,000, a nearly 20-fold increase.
The price at which a company sets its initial public offering can be a big factor, too. Most companies (not counting penny stocks) go public at between $10 and $20 per share. But when Google (GOOG, news, msgs) went public in 2004, its IPO price was $85, virtually guaranteeing that it would soon hit triple digits.
The final -- and perhaps most important -- determinant of share price is a company's attitude toward stock splits. A split changes none of a stock's key measurements of value. But many firms believe investors will find their stocks more appealing if the absolute price doesn't get too high, and so they split their stocks regularly. By contrast, Berkshire's Class A shares reached six digits not only because of the company's long and successful record but also because Buffett despised splits (he consented to splitting Berkshire's Class B shares early this year to facilitate the purchase of Burlington Northern).
As of May 21, 44 stocks trading in the U.S. fetched $100 or more. Below, we focus on six with bright prospects. (Most share prices are as of the May 20 close.)
Internet giant on sale
Google's once-unstoppable shares are in retreat. At $472.05, the stock is more than one-third below its record high, set in November 2007. It's having a particularly rough 2010, dropping 24% through May 21 because of concerns about slowing growth and Google's decision to effectively shutter its search engine in China.The good news is that the stock's valuation has fallen to a level that would have seemed unimaginable just a few years ago.
Click graphic to see interactive chart
And although Google's growth is clearly slowing (not surprising, given that revenue nearly hit $24 billion last year), the company has a firm grip on its primary market and plenty of opportunities to expand. "Paid search" -- in which website owners pay a fee to have their sites receive top placement in search results -- accounts for nearly all of Google's revenue. This segment should continue to grow as advertisers continue to flee to the Internet. Google is also working on its own PC operating system -- a direct challenge to Microsoft's (MSFT, news, msgs) Windows empire -- and is developing an Android-based tablet computer to rival Apple's iPad. (Microsoft publishes MSN Money.)
The Mountain View, Calif., company has a pristine balance sheet: no debt and a cash stash of $26.5 billion. "Google is a core holding trading at a compelling valuation," says Scott Kessler, an analyst at Standard & Poor's. S&P's 12-month target price for Google is $725.
A cultural phenomenon
Until the current correction got under way, the face of the bull market was Apple (AAPL, news, msgs).The stock soared from $78 in early 2009 to a peak of $272.46 in April, adding more than $150 billion to Apple's market value. It closed May 21 at $242.32.
Click graphic to see interactive chart
Apple
Despite the stock's ascent, Apple shares are not outrageously expensive. That's because the appreciation has been commensurate with profit growth. Apple sells for 18 times estimated earnings of $13.32 per share for the year that ends this September. Like Google, Apple has a fortresslike balance sheet. The company holds $23 billion in cash and has no debt.
Continued: A bet on the economy
