Sticker Shock: Don’t Let It Stop You

Fools Isaac Pino and Matt Thalman discuss one key investing point that both new and old investors need to keep in mind when searching for stocks to buy.

The "sticker shock" of such high-profile companies as Google (NASDAQ: GOOGL  ) , which trades at $810 per share, and Apple  (NASDAQ: AAPL  ) , which trades at $450 a share, can turn investors off and lead them to miss a great opportunity. But a high share price alone doesn't mean a stock is expensive or that the price can't go higher in the future.

One metric investors should be looking at is the price-to-earnings ratio. Google trades at a P/E ratio of 25, while Apple is even cheaper, at only 10. Compare that with 3D Systems (NYSE: DDD  ) , which has a shares price of only $31 but trades at a P/E of 66.

In Apple's case, an investor is paying $10 for $1 worth of earnings. With Google, it's slightly more expensive, at $25 for every $1 of current earnings. With this sort of thinking, 3D Systems' $31 share price doesn't look cheap anymore, even though it is 14 times less expensive on a dollar basis than Apple.

One more thing to remember is that a 10% return on $2,000 in Google is the same as a 10% return on $2,000 in a $31 per share stock. What you must determine is this: Which one carries more risk?

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  • Report this Comment On March 23, 2013, at 1:06 AM, TangoXray7 wrote:

    Clearly Google carries the largest risk since they deal in intangibles and are past their growth curve.

    Apple follows close behind because they have reached the apex of their current technology and are now in decline, however they still manufacture physical products.

    3D carries the least risk since it is in a growth segment of a rapidly evolving technology.

    Do I get the prize?

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