By JACK HOUGH
Nominal stock prices shouldn't matter. If Groucho Tech and Harpo Corp are identical companies, it should make no difference to investors that Groucho has 10 million shares outstanding priced at $4.50 apiece, and Harpo has one million shares selling for $45. After all, companies can lower or raise their stock prices at will simply by splitting or reverse-splitting their shares.
Yet price does seem to affect performance. A 2006 study of eight decades of trading data found that sub-$5 stocks beat $20-plus stocks by an average of 0.8 percentage points a month--nearly 10 percentage points a year. Since the 1960s, the outperformance has been smaller but still significant: 0.5 percentage points a month, or 6 percentage points per year.
Companies seem to have caught wise to the appeal of low stock prices. During the Great Depression, eggs sold for 18 cents a dozen and an electric washing machine could be had for $34. But a typical share of stock was $35, the same as today. That's because most companies periodically split their shares. Freeport McMoRan (FCX),
If low-price stocks outperform, why not buy only ones with single-digit prices? Careful there. There are far more important factors than share price to consider, including things like price-to-earnings ratios, earnings growth prospects, dividend payments and debt levels. And keep in mind, just about every company that has gone belly-up has worn a single-digit share price shortly before it did.
The Fidelity Low-Priced Stock fund has had success with its strategy, returning an average of 10% per year for the decade ending July 31, versus 6.5% for its benchmark, the Russell 2000. But it shops for stocks under $35, not $10, and it holds many that have since traded well higher. UnitedHealth Group (UNH),
I recently searched through the S&P Composite 1500 index for stocks priced under $15 and found nearly 350 of them. Many of the lowest-priced ones were attached to deeply challenged companies. By searching for modest price-to-earnings ratios and recent analyst upgrades, I reduced the list to fewer than two dozen companies. Below are listed three.
American Eagle Outfitters
Teen clothier American Eagle Outfitters (AEO)
Arctic Cat (ACAT)