The $1,000 Club

12/06/2013 10:00 am EST


In Kiplinger's Personal Finance Magazine, David Milstead looks at four stocks that have made it above the $1,000 per share mark.

Steve Halpern: Joining us today is David Milstead of Kiplinger's Personal Finance Magazine. How are you doing today, David?

David Milstead: I'm good, how are you?

Steve Halpern: Very good, thanks for joining us. In the new issue of Kiplinger's that just hit the newsstands, you wrote an article called The Four Figure Club, meaning stocks that reached the $1,000 per share level. While such a high price might scare some investors away, you note that this high price tag doesn't necessarily make these stocks expensive. Could you explain?

David Milstead: Sure, it's not the share price that actually makes a stock expensive, even though these are at least $1000 apiece. It's actually how much a stock costs in comparison to the earnings that a company produces, expressed on a per share basis.

In the case of both, Google (GOOG) and Priceline (PCLN), which are featured in this story, the market expects each of these companies to produce about $50 in earnings for each share of stock that's on the market.

And, so, when you have their share price over $1000, it's really only 20 times those earnings, a price to earnings ratio of about 20, and there are plenty of stocks on the market that trade for $10, or $5, or $20 that have price to earnings ratios that are much higher than that.

So, really, it's not the fact that these stocks are $1000 apiece; it's what they cost, in terms of how much earnings power you're actually buying, and, in the case of many of these stocks, the price to earnings ratio isn't really that high at all.

Steve Halpern: Now you note in the article that the $1,000 Club is still very exclusive. In fact, there were only four stocks that made the list and two of them, Berkshire Hathaway (BRK-A) and Seaboard (SEB) have been above this level for some time. Can you tell us a little about those companies?

David Milstead: Sure. Well, many investors know Berkshire Hathaway. It's the investment vehicle for Warren Buffett, the famed investor. He has never split the primary shares of his company and so they've traded it for tens of thousands of dollars apiece for quite some time.

He did, however, create another class of shares several years ago and after he bought the Burlington Northern, or Berkshire Hathaway, he bought the Burlington Northern Railroad a few years ago in 2009, I believe it was, he actually had to split those shares down to a level in the $65 range at the time.

And so they became much more accessible price, these class E shares of Berkshire Hathaway, but the class A shares, the shares that have been in existence since Berkshire Hathaway became a public company, those are the most expensive on the market.

Seaboard is really, actually, relatively unknown. It's an odd company that has a lot of agriculture and, per the name Seaboard, it engages in shipping.

They do commodity trading, they own a sugar plant in the Dominican Republic; it's really an interesting collection of businesses, and again, not very well known, and it's another company that is controlled by a family and they have never have split the shares.

Splitting the shares is a practice in which you get, for example, twice as many shares as you did before, but you're entitled to, you know, half as much of the earnings as before, and so, share splits cut the price of a stock, but preserve your economic interests.

And for whatever reason, Warren Buffett and the managers of Seaboard have not been willing to split the shares, and that's what's made their price so high.


Steve Halpern: Now, the two new stocks that joined the $1,000 Club are both fairly well-known to listeners. They're Priceline and Google. Can you walk us through your outlook for those two companies?

David Milstead: Sure. We talk about Google and we hear about all the fantastic new things they're trying to do, like Google Glass, those eye glasses that are connected to the Internet.

But really, we overlook sometimes the fact that the core business of Google, where the company started—of providing search results for the Internet—is still a very strong business.

They're capturing an amazing amount of Internet-based advertising revenue, and the outlook for that is that they are simply going to continue to do that.

In addition, they were criticized some years ago for their expensive purchase of YouTube, the video Web site, but, as more and more people watch videos online, YouTube is becoming more and more of a money maker for them.

We don't know the exact numbers, but all signs are pointing up for online video, and the amount of video people watch, and so YouTube should be a growing contributor to Google's earnings, so they have consistently performed well.

They've grown earnings at a very high rate for several years and there isn't a whole lot of sign that they're going to assemble anytime soon, and that's what's helped make their shares cross the $1000 mark—and, in fact, they are up about 5% or 6% since the article was first published.

Steve Halpern: Now, finally, Priceline. I guess you can't really name your own price anymore, because it's over $1,000.

David Milstead: Exactly, and, you know, we think of Priceline as a name your own price Web site, and we see the silly advertisements with William Shatner, but what we fail to appreciate in the United States, is how much international business Priceline has.

The leading European Web site for booking hotel rooms—and that's not a name your own price concept—it's simply that the hotel rooms are offered up at certain prices and people book them.

They also have growing presences in many countries across the world, particularly in what are called emerging markets, in Asia, and other places where online adoption is at much smaller pace than it has been in the United States, but it's growing.

It's starting to grow more quickly and so people are particularly excited about Priceline's international prospects in these growing markets, and also, like Google, they've grown earnings at a very high rate for several years now.

They have executed well, as we like to say about management of well-run companies, and again, there hasn't been much sign that they're going to mess up anything in the near term; and that stock is up over 15% just in the last few weeks.

Steve Halpern: Well, thank you for joining us. We appreciate your insights.

David Milstead: Thank you for having me.

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