I recently saw a comment on one of the stock market chatrooms about a stock that was trading at $105 a share. The poster said, “this stock is going to come down. It’s just too expensive for anyone to buy at this price.”

But was it? The poster was alluding to the $105 price of the stock and not the underlying fundamentals of the stock (how much money the company was earning, how much it was spending, its growth prospects etc.)

It has been thought in the past that companies will split their stock once it goes over $100 a share as that has historically been the point where it was considered “too expensive” for the regular investor to afford it.

But that concept (of the split to keep the share price down) seems old school now with multiple stocks trading over $100- including some of the most popular companies like Google.

Some well-known companies that trade over $100:

Berkshire Hathaway A Shares: $117,200
Berkshire Hathaway B Shares: $3913
Boeing: 105.46
Chipotle: 119.26
John Deere & Co: 147.39
Energizer: 110.26
FedEx: 104.64
Goldman Sachs: 216.78
Google: 567.50
IBM: 117.71
Mastercard: 148.00
Toyota: 115.88
United States Stee: 106.04
Washington Post: 804.01

By purely price standards, all of these stocks are “expensive.” To buy 10 shares of Boeing, would cost you over $1000.

But with stocks you have to look beyond the actual share price to determine whether a stock is actually priced right. It is sometimes difficult to do. John Deere, for instance, certainly seems really pricey at $147 a share. You have to look beyond the $147 to really determine its value.

How to Find a Stock’s Value

I use MSN Money for my financial data because that website provides easy to understand data on a company’s financial condition.

Put in the ticker for Deere & Company, which is “DE” in the symbol box at the top of the page.

It will give you a quote for DE. On the right are some categories that will help you determine whether a stock is “expensive.”

The first category is Price to Earnings or P/E. For Deere & Co. the quote states 20.10. For P/Es, the lower the number, the “cheaper” the stock. This is telling me that Deere & Company is trading at 20 times the P/E which isn’t horribly expensive. The overall S&P 500 is trading at 17 times earnings (has a P/E of 17.) Historically, the S&P 500 has traded around 16 times earnings. With these guidelines, we can conclude that DE is not super cheap- but it’s not out of sight expensive.

Another interesting category to consider on that same page is the Return on Equity or ROE. Not all stock quote pages give you this information but it is very valuable to have in determining the “value” of a stock. From Investorwords.com:

ROE. A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company’s efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.

Huh? Does this sound like a foreign language to you too? Don’t despair.

Remember ROE this way: Warren Buffett doesn’t invest in a company unless the ROE is consistently over 12.

Is Deere & Company “expensive”?

We already see that DE has a P/E of about 20. It’s return on equity is 21.45, which is excellent. Based on these two factors, it doesn’t appear that DE, which is trading at $147, is all that expensive.

Let’s consider another company on the list of high priced stocks.

Is Chipotle “expensive”?

Chipotle’s stock has been hot since it’s spin-off from McDonalds a few years ago. The company is rapidly expanding and many investors are betting on continued growth.

According to the stock quote, Chipotle’s (CMG) P/E is 71.40. Wow! Seems really high. MSN Money also tells you the “forward P/E” (that is looking ahead a few quarters) and that number is 59.00, also really high.

But this stock is a fast grower- which means that it is growing its earnings so fast, some investors think it will be able to keep up with the share price.

Now let’s check out the Return on Equity, or ROE. It is 11.71. That is just below Mr. Buffett’s ROE of 12 cut-off. If you actually dig deeper into the companies numbers, you will find out that the Return on Equity for the last few years is not great.

On the left hand column of the page you will see a link for “Financial Results.” Click on that. Look at the left hand column again. Under the “Financial Results” link is a link for “Key Ratios.” Click on that.

Now- one more click.

In the middle of the page is a list of links, click on the one that says “Ten Year Summary.”

You can see the Return on Equity for the last ten years on this chart. Chipotle is a new company and only has information for the past three years. The chart for ROE states:

2006: 8.7%
2005: 12.2%
2004: 2.3%

Buffett believes the ROE should be over 12 consistently- year in and year out. You can see from these numbers that Chipotle doesn’t cut it.

Is Chipotle too expensive at $119? The answer would be “yes.”

Stocks are not a pair of jeans. A pair of jeans may seem really expensive at $150, but a stock may not be. You have to train yourself to look beyond the share price. $1000 of Deere & Company may be a better investment, even at $150 a share, then $1000 of La-Z-Boy (trading below $8, but having a very difficult time selling its product in this down housing market.)

Look beyond the “price” of the stock when investing.

Lots of investors get hung up on the number of stocks they should own. Some think they need to have 50 or 100 to be “diversified.” Others say you need to be in only 10.

Investors have a habit of buying more stocks (and mutual funds) than they need to. Morningstar recently asked how many stocks you should own to be diversified:

Let’s hear from the experts. In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, “…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks.” In other words, if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.

Does owning only 18 stocks scare you?

I can hear your question already: what if one of them is Enron? Or Worldcom? What if I lose it all????

Let’s say, for instance, that you DO own an Enron among your, say, 20 stocks. If they are all pretty evenly distributed with $1000 each, you would lose $1000 on your Enron investment. Would it stink? Yes. Is it totally devastating to your overall portfolio? No.

If you invest in 20 stocks in a variety of industries (to give you diversification) you should be able to have a pretty healthy portfolio that is easy to track.

The problem with having 50 or 100 companies is that no one can track that many companies successfully. Even the greatest investors like Peter Lynch have said that 50 is the most they are able to follow at any one time.

Also, be careful of being overweight in any one sector. Back in the 1990s, investors got burned because they owned 20 stocks, but 15 of them were in the technology sector. It’s okay to own a few in the same sector but you should equally weight most of the sectors amongst the stocks.

Equal weighting will also make you feel better during the times when one sector is not doing well but others are.

Don’t be afraid that 20 or 25 isn’t “enough.” It is plenty to create a well-rounded portfolio.

Pfizer. Merck. Wyeth. Johnson & Johnson. Eli Lilly.

These stocks were sure things back in the 1990s. Investments in even one of them made you a very rich person.

But that was then and this is now. A $1000 investment in Pfizer in 1997 - with an additional investment of $100 a month every month under a plan like that available on Sharebuilder (which would be very dedicated investing) would have meant you had invested $13600 over that 10 year period (dividends reinvested.)

It would be worth “only” $16686 - for a 10 year return of only 22.7%. That’s less than 3% a year!

Who would have thunk it about a company like Pfizer?

How many dedicated Pfizer shareholders are holding on- thinking if they just wait long enough- they’ll see a big upturn on their investment?

Lots.

And who can blame them? As I said, the 1990s were an era of great returns in Big Pharma stocks.

But how do you know when it’s time to stop investing in a Pfizer (or a Microsoft- same story) and instead invest in a Costco or a Google? When do you finally give up on a company and put your money elsewhere?

It’s a hard question to answer. If you’ve been investing in a company for ten years though, you should know its story. You should know, even after five years, if the possibility of a greater return is there.

Warren Buffett has said that the only time to sell is “never.” So should you wait out a company like Pfizer? Even their management has said that they will be growing at only 3% a year for the foreseeable years. Google is growing at 10 times that rate.

It would seem that these stocks that have done nothing and gone nowhere are still not quite cheap enough to take a chance on them. Microsoft and Pfizer are trading under their historic price to earnings multiples, but I wouldn’t exactly call them a steal even at their current prices. Pfizer is at ten times earnings and Microsoft around 21 times. But with a big market sell-off- it’s likely that they will be sold off aggressively.

But should you now sell if you already own them?

Pfizer is paying nearly a 4.5% dividend so at least you get something for your pain. Are you satisfied with a CD rate for your money? No, me neither.

Microsoft pays an even smaller dividend. Its return has underperformed the market in the last year. (the S&P 500.)

It’s hard being a buy and hold investor and seeing everyone else double their money in a few months (or years.)

If you own a true loser like Cost Plus World Market, Pier 1 or others that have simply been money losing companies- sell and don’t look back. But it’s these big caps that are the middle of the road that are problematic. Good companies. Nothing fundamentally wrong with them. Dead stock prices.

Ultimately, a Pfizer or a Microsoft will rise again. The best bet is probably to just sit on your holding and don’t add further money unless the stock goes seriously cheaper. And look at other areas in which to invest your new cash.

You just filled up your SUV. Nearly $100.

You went to a baseball game this weekend with a friend, parked at the stadium, had some hot dogs. About $100. (double it if you took your kids)

You bought the latest pair of fall shoes. $100.

But let’s say you spent that $100 on ExxonMobil’s stock a year ago instead.

According to Sharebuilder’s great “what if I had invested” feature, its value today would be $122.

Not too shabby. For $100.

What if you had bought General Electric instead? $119.

What if you had spent that $100 on Exxon’s stock 5 years ago? Its value today would be $256.

Many investors think $100 gets them nowhere. But it can take you everywhere.

Problem is you have to start now. You have to invest it now to make it happen.

Only $100.

The Motley Fool recently had an article with a chart laying out what the returns would be if you had invested $100 in 7 different big name American companies in 1971 and let it sit there (all dividends reinvested.)

Invest $700. Step back. Wait. Let it grow.

The companies were:

GM, IBM, GE, McDonald’s, Boeing and Altria Group (aka Phillip Morris)

Result?

$165,720.45

What if that investor had been putting in $100 additional dollars every month? He’s be rich! Rich as Paris Hilton.

If you had started just ten years ago with $100 and put in an additional $100 every month into ExxonMobil you’d be building a nice little nestegg. You would have invested $12,700. It would be worth, dividends reinvested, $30,894 for a gain of 143.3%.

For just $100 every month.

The power of time and compounding is magnified as the years go by (with slowly growing but stable stocks.)

According to the Motley Fool, $1000 invested on January 4, 1971 in McDonald’s would be $1.8 million today. $1000 invested in Altria Group on that same day would be $7.4 million. Altria Group was the best performing stock of the S&P 500 over the last 50 years. Obviously, lots of money in smokers.

Conversely, $1000 invested in GM in 1971 would be worth only $7,480 today. Not so much money in the car manufacturers.

You win some. You lose some. But you have to be in the game to find your financial freedom.

All for $100.

Can you find $100 a month?