Do you suffer from cheap-osis? If you're hung up over the price per share at which you invest, consult a physician immediately -- you've got a case of the 'osis. A colleague of mine has this all-too-common malady. She once told me that she'll never buy a company at more than $50 per share. Her reason? "Too expensive."
Unfortunately, too many investors are under the impression that they cannot afford a company if its share price is above $100.
The consequences and cause of cheap-osis
Investors who shied away from Google (Nasdaq: GOOG ) shortly after its IPO at $132 would have missed out on the 190% gain between then and now. Moreover, my colleague would have missed out on buying Starbucks (Nasdaq: SBUX ) at $61.25 in March 1999 or Caterpillar (NYSE: CAT ) at $89.40 in January 1994. Since then, shares have grown by 300% and 520%, respectively, after adjusting for splits.
My colleague also would have thought Incyte (Nasdaq: INCY ) was the better buy when it was at $19.50 in the beginning of 2002, only to watch it fall to $4.56 today for a 77% loss.
Of course, "expensive" stocks are not the answer, either. Investors who saw the potential in Quality Systems (Nasdaq: QSII ) at the beginning of 2000 and bought at $7.50 have enjoyed greater than 2,000% returns since then.
The cause of cheap-osis isn't known. One theory, however, is that investors desire to own a large number of shares. But think about that for a second. Is it better to buy 24 shares of Expeditors International (Nasdaq: EXPD ) at $41.67 or 113 shares of CNET Networks (Nasdaq: CNET ) at $8.85? With no other information provided, your answer should be "I don't know." In both cases, you'd have $1,000 invested. Bottom line: The number of shares doesn't matter.
The way to recovery
The only way to tell one stock's merit from another is to take a look at the companies, find out what their prospects are, and determine how likely they are to grow sales, earnings, and cash flow. That is what determines if the $41.67 stock is better than the $8.85 one.
The cure to cheap-osis is to realize that the per-share price cannot tell you whether a company is a good investment. Instead, use the underlying worth and prospects of the company to determine if the current price is expensive or cheap.
The Foolish bottom line
At Motley Fool Stock Advisor, Fool co-founders David and Tom Gardner focus on businesses, not share prices, to find great investments. They research a company, determine how it is doing and how it is likely to grow into the future, and then decide if it is worth buying.
Since first starting more than four years ago, their recommendations have managed to beat the S&P 500 index by more than 38 percentage points. If you'd like to see what they're recommending today and start the road to recovery from cheap-osis, click here to join the Stock Advisor community free for 30 days.
Fool contributor
Jim Mueller
owns shares of Starbucks and Expeditors International. Starbucks and Quality Systems are Stock Advisor recommendations. CNET Networks is a Rule Breakers recommendation. The Fool's disclosure policy is sick -- in that good, slang way.
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