Should You Be Afraid Of High Priced Stocks?

Should you be afraid of high priced stocks?

Let’s take a look at two stocks: Google (GOOG) and McDonald’s (MCD). Both are household names, but judging by market capitalization, Google is worth almost 2.5 times the value of McDonald’s.

Photo by AComment, courtesy of flickr

Today, Google’s share price is hovering around $465. There are approximately 316.57 million shares outstanding and the company’s market capitalization is over $147 billion.

On the other hand, McDonald’s shares are trading close to $57 each. There are 1.09 billion shares outstanding and the fast-food chain’s market capitalization is over $62 billion.

Which one is too high?

To someone who owns shares of Berkshire Hathaway, buying one share of Google may be comparable to the average person buying a hamburger from McDonald’s.

But for someone who only buys penny stocks, buying one share of McDonald’s may feel like treating the office to lunch.

Who can really say what’s too high or too low? One huge determinant of a “high” versus a “low” price is the number of shares outstanding.

If Google had 1.09 billion shares outstanding (like McDonald’s) then each share would be worth just shy of $135 each.

Is that better than $465? If cheaper means better, then the answer would be yes. But really, the answer is no, because the overall value of Google’s equity would stll be $147 billion. Besides, even at $135 some people may still consider Google to be too high.

My point: “High” and “low” mean different things to different people. Value should drive investment decisions moreso than these two labels.