Look beyond stock prices
Beginning investors often make the mistake of concluding too much from a stock’s price. For example, they may assume that a $30 stock is “cheaper” and a better bargain than a $75 stock. That’s not necessarily true.
Consider Southwest Airlines and Alaska Airlines. In the past month, each one had a stock price near $33. But the two companies, while both generally well-regarded, are quite different. The market capitalization of Alaska Airlines was recently about $4.4 billion, for example, far lower than Southwest’s market cap near $20.4 billion. Market capitalization is a stock’s market value — the total value of all its outstanding shares; Alaska recently had about 123 million shares outstanding, while Southwest had 589 million. Both companies have recently suspended their dividends, but before doing so, Alaska’s dividend yielded around 4.3%, while Southwest’s yield was around 2.2%.
So which one is the better value? Well, Alaska’s heftier dividend yield would have been more appealing — but Southwest’s dividend was growing more rapidly in recent years, and that can count for a lot. Also consider the price-to-earnings (P/E) ratio — the current stock price divided by the last 12 months’ worth of earnings per share (EPS). Alaska’s P/E ratio was recently 8.7, while Southwest’s was 10.4. A lower P/E ratio generally indicates a better value.
Never rely on any one or a few numbers when deciding whether to invest your money in a company. Your hard-earned dollars, invested properly, could grow to provide a down payment on a home or critical retirement income. So take your investing seriously, and don’t act on hunches or someone else’s hot tip.
A stock’s price doesn’t tell you much at all, except how many shares you can buy with the money you have. Look at a wide range of factors when studying a company, such as its management, brand strength and competitive advantages; its debt load, revenue and earnings growth rates and other figures; and its risks, challenges and more.
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