A $750 Stock Can Be a Bargain

A few key misunderstandings trip up many investors -- especially the distinction between price and value. Don't let yourself think that a stock is cheap just because it trades for $6, or that it's too pricey just because it'll currently cost you $80 per share.

Here's one example of why that logic's off-base: Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), the company run by superinvestor Warren Buffett. Its class-A shares recently traded at a dizzying $95,000 per share. (You read that right.) That probably seems sky-high to you, right?

What about an $82,000 stock? That may also seem a bit out of your price range. But just about a year ago, that's what Berkshire class A shares were trading for. They advanced more than 15% this year, which makes an investment in that $82,000 a lot more tempting in retrospect.

People tend to think that lower-priced stocks are better investments, because if they go up a dollar or two, it will make a bigger difference to the bottom line. They fail to realize that while a $50 stock might go up (or down!) by a dollar in a day (representing a 2% move), a $50,000 stock might well go up or down by $1,000 in a day (also representing a 2% move). Indeed, between Aug. 15 and 16, shares of Berkshire class-A stock advanced by $1,850 per share -- or 2%.

The $750 bargain
Washington Post (NYSE:WPO) also carries a seemingly steep stock price. A single share will set you back around $750. The unsophisticated investor might balk at that price tag, looking for something "cheaper."

Less than two years ago, though, the share price was near $1,000. The significant price drop may stem from Washington Post's reputation as a newspaper company. But Washington Post is now much more than that; its Kaplan educational unit now contributes the biggest chunk of the company's revenue and profits. (Remember Stanley Kaplan test-prep courses? They belong to the Post now.) Enrollments have risen nearly 40% over the past two years.

Even Washington Post's newspaper business, an industry headed south on many media companies' financial statements, posted a modest profit in recent quarters. The company also owns cable properties, which posted a 9% increase in operating income over the past two quarters. Is this a slam-dunk best buy right now? Not in my eyes. But I am a shareholder, and I'm hanging on. It's well worth your time to learn more about interesting companies like this one, instead of dismissing them merely because their shares appear too pricey. (In Washington Post's case, consider starting with CEO Donald Graham's recent mid-year media briefing, available in PDF format.)

Looking for bargains
As you look for bargains, remember that share price alone means nothing. You need to compare that price to some other figure, like income. Check out the recent numbers below for some well-known companies:

As the table above shows, the $750 stock has a higher dividend yield, a lower P/E, and higher net profit margins than some others listed. (Of course, if you keep hunting, you'll likely find companies that are even more compelling.)

Don't overlook the dividend column, either. Kodak might look tempting, with its reasonably attractive yield of 2.5%. But look at its other numbers, and you'll see that the company isn't profitable right now. Remember that with any company, you need to look at a lot of factors, both quantitative and qualitative, to gauge the company's growth potential, fiscal health, and competitive position.

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Sara Lee is a former Motley Fool Income Investor pick.

Longtime Fool contributor Selena Maranjian 's favorite discussion boards include Book Club and Television Banter . She owns shares of Berkshire Hathaway and Washington Post. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.