There’s an old adage that rings true in just about every walk of life, and it states simply, “you get what you pay for.” This slice of homespun wisdom is particularly poignant when it comes to stock picks and stock investing advice. That’s because most often, the best investments out there can come with a high price tag.
Why? Well, why do the highest quality automobiles come with a hefty sticker price? Why does beachfront property on the California coast cost millions more than the national median price of a home? Why does a five-carat flawless Tiffany (NYSE: TIF) diamond ring cost hundreds of thousands of dollars?
The simple answer is that just like diamonds or high-priced autos these items are perceived to be better than the competition, hence their bigger price tag. The same principle applies to stocks. The stronger the company, i.e., the stronger the earnings, the bigger the market share, the better the management team—the higher the share price.
One major mistake novice investors make is to think that they shouldn’t buy a stock because it comes with a high price tag. Here are three representative examples.
Apple Inc. (NASDAQ: AAPL). By now the whole world knows that this company is the revolutionary leader in personal technology. It’s also one of the most profitable companies in history. Even with its iconic leader Steve Jobs battling health issues, AAPL shares continue pushing higher. Over the last 12 months, the stock is up 70%. In the past five years, Apple shareholders have seen their investment jump 380%. That’s what I call getting what you pay for.
Baidu, Inc. (NASDAQ: BIDU). The Chinese Internet search site is one of the fastest growing online companies in the world, and the burgeoning online community in China is a big reason why. As of last year there were approximately 420 million Chinese Internet users. That’s about 120 million more people than currently live in the United States. With that kind of massive user base, it’s no surprise that BIDU shares have jumped 135% over the last 12 months, and an astounding 2,148% over the last five years.
Priceline.com (NASDAQ: PCLN). The online travel site just logged a 71% profit in the fourth quarter due chiefly to a surge in international bookings and hotel bookings. The company has clearly been the winner in the online travel space, as its business model has sent competition like Expedia (NASDAQ: EXPE) and Orbitz (NYSE: OWW) to the woodshed. During the past year high-priced PCLN shares are up 105%, and over the last five years shareholders have booked a 1,834% flight.
Like I said, you get what you pay for.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.
