Sorry, bargain hunters: Cheap stocks are dead

A lack of splits means fewer big-name companies care about low share prices.

By InvestorPlace Dec 18, 2013 9:38AM
A bunch of dollar bills © Tetra Images, Getty ImagesBy Jeff Reeves

Cheap stocks are one of the most popular corners of the market. Whether you're after high growth small caps or the best penny stocks for gigantic profits, cheap stocks are the place investors look first.


But cheap stocks are dwindling in number lately -- and it's not just because of the big rally.


It's because stock splits have dried up.


A mere 11 companies in the S&P 500 Index have executed a stock split in 2013. That's the fourth-lowest figure in history, and down from a historical average of 65 stock splits annually across the 1990s.


If you’re unfamiliar, a stock split is a simple math equation that doesn't change the underlying nature of a stock -- just the math behind its shares.


If a stock splits 2-for-1, it doubles the amount of shares outstanding but cuts its stock price in half. If a stock splits 3-for-1, it triples the amount of outstanding shares but slashes its stock price to one-third of its previous level.


Take Colgate-Palmolive (CL), one of the 11 stocks that have split shares this year. At the beginning of May, CL traded for just over $120 a share and almost 500 million shares outstanding, for a market cap of about $60 billion. Now, the stock trades just north of $60 a share and has almost 1 billion shares outstanding -- but the market value still sits around $60 billion.


The value of the company doesn’t change, just the value of the stock.


Without splits to drive down share prices, however, there are fewer cheap stocks on the market. Just look Apple (AAPL), Amazon (AMZN) and Priceline (PCLN), which refuse to split their share price and trade for hundreds of dollars.


At this point, even a 3-for-1 split on Apple or Amazon wouldn't make them cheap stocks by any stretch. Most investors consider cheap stocks to be investments that trade under $25, though hopefully under even $10 a share.


While it's true that some cheap stocks are sometimes a bargain only because they have fallen from grace -- take BlackBerry (BBRY), which trades under $10 as it circles the drain in the wake of slumping sales and big losses -- cheap stocks are an important corner of Wall Street.


And when you couple far fewer stock splits with much higher share prices during a bull market, the result is that many investments trade for a high nominal share price.


While there will always be some cheap stocks under $10, this could be the end of quality cheap stocks as we know them, particularly in the blue-chip arena.


If companies don’t feel a need to split shares anymore, the only low-priced options will be battered companies.


More From InvestorPlace

As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.

VIDEO ON MSN MONEY

16Comments
Dec 18, 2013 10:26AM
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This has always been an interesting topic.  Companies have a variety of reasons for splitting, or not.  From a purely logistical standpoint, the more shareholders of record you have, the more paperwork and expense involved.  If a stock like Apple or Google or Amazon was trading at $10/share, you could end up with millions of "mom and pop" shareholders - probably not something those companies want.  On the downside, it's always been easiest to buy and sell 100 shares at a time - for Apple, you'd be talking about a $50k investment.   For Amazon, 100 shares will cost you almost $40k.  That's a pretty sizable chunk of change for most people. 

For the most part, the higher the share price, the lower the volume.  A popular stock like Google that trades over $1000/share sees just a couple of million shares trade hands on any given day.  A popular stock like GE, trading at $30/share, routinely sees 30-40 million shares traded daily.
Dec 18, 2013 11:23AM
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Saying there are no cheap stocks?  Why not just say all sectors appear fully priced.  Cheap denotes something negative.  Notice the convoluted info on housing this morning.  One article saying housing permits rising the other saying mortgage apps dropped for the seventh straight month. When it appears we have the same number of Bulls and Bears I would conclude we are fully priced.  Sitting on our cheeks waiting on the FED.  Reminds me of the old rolling stones song "waiting on a friend" but is the FED going to be a friend this time or not?  I think there is a greater threat of deflation than inflation and assuming deflation is the bigger fear I say they stand pat and markets go up.  But then again buy on the rumor sell on the news at least for a day or so.  Go figure.  Now I sound like Cramer, they will either go up or go down.  Which is my Perfect call!
Dec 18, 2013 10:54AM
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True and that means the only way for small investors to buy in is through ETFs or Mutual Funds - This is not a good thing.  These funds siphon off a lot of the investment value.
Dec 18, 2013 10:15AM
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There is no such thing as a Cheap Stock because that implies you know what the Future holds. Seeing that no Human holds such power, that's impossible. Especially since literally everyone states you can't time the Markets, then you can't time Cheap.

The Title should be low priced shares are dead, not cheap. But that's not even true, Plenty of low priced shares, doesn't make them Cheap however. Don't worry, Eventually when the FEDS corrupt polices come back to bite everyone, there will be plenty of low priced shares to choose from.
Dec 19, 2013 2:51AM
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You small peons aren't welcome into the big boys club!

You morons will never get it!

Stupid is forever!

Dec 18, 2013 11:10AM
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There's always cheap stocks around somewhere...Many aren't worth buying, unless you want to fly by the seat of your pants....


And others you don't want to be holding when they go cheap, after you paid much more.

Can happen to anybody...

Dec 18, 2013 11:38AM
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Folks working the short side have gotten creamed the last few months.  From Facebook, Twitter and now Herbalife being short has been very expensive.  Much of these daily blips have much short covering to them.  Icahn is a very crafty character and I'm thinking his next target is Apple.  What he seems to do so well with his vast sums is using money and the media to bid up Companies using both fronts, let them sit for a bit, and then with an equally aggresive negative campaign run them back down.  Making it both ways is very risking but give the guy his due.  He makes it happen.
Feb 20, 2014 1:36PM
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Cheap stocks are NOT the same as low priced stocks as they're called here.

Cheap stocks are those whose value, whatever method you use to evaluate it, is greater than the current share price.

Dec 19, 2013 3:30PM
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I can't believe no one... but no one saw the rally coming on the tapering ...  what use is this site??? Now this site tells us investors are worried about housing numbers
Jan 28, 2014 3:59PM
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Buffett would buy cheap stocks, get control, use his genius, and reap the rewards.  Look at all the people he made rich.  That's one way for the small investor to play it, if you can find one.  Buffett doesn't split ever, but there may be others out there you can ride along with, as long as they aren't a scam, anyway.  Sorry, Bacon!
Dec 18, 2013 11:55AM
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We opened up this morning but we all know its just bogus.....The selling will start anytime now, manipulators salivating waiting for the Fed, regardless of what is said they will do their thing as usual....Volume is better today and the amount of crooks on and off the floor is unreal....Buckle your seat belts this afternoon folks, its scumbag time....More later.
Dec 18, 2013 12:54PM
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The most bitter people around are the ones that missed the bull market that started when

Obama took office.It`s always"BOO HOO HOO, it`s all because of FED MONEY"Doesn`t

the right wing carrying and bellyaching get old?

Jan 3, 2014 12:36AM
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It is not a stock but Bitcoin is still "cheap."  Wall street is not really involved yet but will be. 
Dec 18, 2013 12:11PM
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Good post by Brutus, food for thought there.

 

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