Sorry, bargain hunters: Cheap stocks are dead
A lack of splits means fewer big-name companies care about low share prices.
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
- The 3 Most Exciting Stocks of 2013
- The Taper Is Coming: Top 3 Ways to Play Fed Tapering
- Jealous Co-Worker Shoots Up SUV of Walmart Employee of the Month
VIDEO ON MSN MONEY
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.
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.
You morons will never get it!
Stupid is forever!
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...
Cheap stocks are those whose value, whatever method you use to evaluate it, is greater than the current share price.
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?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the Wednesday session on a mixed note with small caps displaying relative strength. The Nasdaq Composite (+0.5%) and Russell 2000 (+0.4%) registered modest gains, while the Dow Jones Industrial Average (-0.2%) and S&P 500 (+0.01%) underperformed.
Despite the mixed finish, the key indices traded higher across the board at the start of the session after the advance reading of second quarter GDP surpassed estimates (4.0% versus Briefing.com ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'