Browsing business headlines, one can’t help but notice shares like Berkshire Hathaway trading at ₹2.5 lakh per unit. Such astronomical stock prices make retail investors wonder why some equities are so highly-priced and whether they are worthwhile investments.
This article explains the reasons behind lofty stock valuations, whether higher nominal prices signal better value, and how everyday investors can approach ultra-elite securities.
What Impacts Share Value?
Equity values represent the worth investors collectively assign to a company rather than exclusively its accounting value.
The major inputs include:
- Financial Performance – Strong earnings and promising growth potential command higher valuations, quantified via multiples like price-to-earnings ratios.
- Investor Sentiment – Market psychology significantly sways share prices, sometimes disconnecting them completely from corporate financials.
- Available Float – Lower supply means limited shares to go around, exacerbating price surges.
- Index Inclusions – Becoming a constituent of major indexes like NIFTY50 provides passive fund inflows buoying prices.
So, both quantitative and emotional factors impact eventual share prices. But are steeply-priced stocks always overvalued? Sometimes, but not necessarily.
Advantages and Disadvantages of Buying Pricey Shares
Having a share in some of the most exclusive stocks in the world can be a source of pride and accomplishment.
Potential Benefits
- Inflation protection: Strong pricing power helps maintain profit margins during inflation.
- Recession resilience: Companies with essential products or services fare better during economic downturns.
- Lower volatility: Top-performing stocks experience fewer price fluctuations and smaller losses in a market downturn.
- Enhanced signalling: Increasing ownership stake signals confidence in a company’s direction and fosters positive investor perceptions.
Drawbacks
- Underperformance: Stocks trading at rich valuations can sometimes lag indexes during much of a market cycle before catching up.
- Higher Opportunity Cost: At extremely elevated prices, the missed gains from alternatively investing in up-and-coming stocks could outweigh the benefits.
- Index Exclusion: Most popular indexes exclude securities with high share prices, which prevents them from receiving lucrative fund inflows.
Three Takeaways for Retail Investors
Ordinary investors need not be completely deterred from the highest-flying stocks due to steep nominal share prices.
- Fractional Shares Allow Partial Ownership – Investors can now purchase fractional equity shares commission-free on many platforms. This permits exposure to elite stocks despite limited capital.
- Focus on Percentage Returns – The ultimate measuring stick of investment success relates to percentage gains, not nominal price levels. Pursuing reasonable absolute rather than percentage returns across diverse asset classes allows for building wealth over time.
- Consider Indirect Investing – Those wishing exposure to expensive stocks without directly buying shares could invest in mutual funds or holding ETFs instead. This provides professional management while diversifying beyond individual names.
Berkshire Hathaway
Price per Share: ₹27,00,000
The Good
- Legendary Capital Allocation – Warren Buffett’s 50+ year track record of value investing and operational improvement speaks for itself. Berkshire stock has compounded over 20% annually since 1965.
- Fortress Balance Sheet – With US$125 billion in cash reserves and only US$21 billion in debt, Berkshire holds excess liquidity to deploy opportunistically during market dislocations.
- Wide Economic Moat – Berkshire’s dozens of operating subsidiaries are leaders in their respective industries, enjoying pricing power, cost advantages, and high customer retention.
The Bad
- Key Man Risk – Though 97-year-old Buffett remains sharp, his eventual departure along with right-hand man Charlie Munger marks an inevitable leadership change. Succession plans still need to be completed.
- Sheer Size – With a US$700 billion market capitalisation, rerun potential appears more modest going forward. Just maintaining current growth trajectories presents challenges.
The Verdict
Though priced at stratospheric levels, Berkshire Hathaway still merits investment as Buffet’s swan song plays out. The cash cow conglomerate will likely transition smoothly to compound wealth for years to come steadily.
Price per Share: ₹111,000
The Good
- Brand Equity – Lindt Chocolate’s reputation for Swiss quality and premium positioning helps justify its industry-leading margins.
- Global Footprint – Lindt operates production facilities in Europe and the US while deriving over 70% of sales internationally across 120 countries.
- Pricing Power – As a purveyor of affordable luxuries, Lindt can pass rising input costs to its relatively price-insensitive affluent consumer base.
The Bad
- Small Scale – With annual revenues below US$5 billion, Lindt significantly trails confectionary titans like Mars, Ferrero, and Hershey in market share.
- Commodities Exposure – Though partly hedged, higher cocoa, sugar, and milk costs periodically squeeze profitability. Foreign currency fluctuations present further uncertainty.
- Stretched Valuation – Trading at 45x forward earnings fails to provide much margin of safety. The chocolate sector also faces changing consumer preferences.
The Verdict
Lindt’s focus on premium chocolates makes for a sweet but speculative investment. Approach with caution.
Price per Share: ₹3,60,000
The Good
- Low Leverage Model – By keeping unsold homes off the balance sheet and selling before construction, NVR avoids risks that sunk highly-levered competitors during housing downturns.
- Consistent Execution – Sticking to a selective geographic focus centred around mid-Atlantic suburbs and exurbs has allowed for capturing outsized industry profits.
- Room to Run – Housing markets look to escape recent rising rates and economic uncertainties relatively unscathed. Low existing home inventory still favours builders.
The Bad
- Cyclical Risks – Though this period rides high for now, NVR and other homebuilders remain vulnerable to turns in mortgage rates, prices, and consumer budgets over full economic cycles.
- Valuation Headwinds – The current market price of NVR shares is quite high when compared to the company’s book value and earnings. This means that the stock is already priced to assume favourable market conditions.
- Limited Dividend – Preferring repurchases for capital returns leaves income investors wanting.
The Verdict
The housing market is doing well unexpectedly, which is good news for investors who have invested in NVR. However, it might be a good idea to consider selling some of the NVR stocks to secure profits.
Price per Share: ₹3,32,000
The Good
- Food Inflation Buffer – Record grain, agriculture, and commodity prices pad Seaboard’s results as a top merchant trader. Food inflation appears structural, given population growth.
- High Barriers to Entry – The capital intensity of cargo shipping and commodity processing prevents ease of competition in Seaboard’s niche markets.
- Cross-Segment Synergies – Seaboard pairs its shipping arm with commodity production and processing businesses across flour, sugar, pork, and energy.
The Bad
- Small, Family-Controlled – As part of the $5 billion Seaboard Group controlled by the Bresky family, the publicly-listed portion offers limited float and disclosure.
- Cyclical Industries – Though enjoying tailwinds at present, margins across Seaboard’s segments ebb and flow with commodity and transport pricing over time.
- Opaque Reporting – Details on segment performance remain scant, challenging precise valuation.
The Verdict
Well-positioned to navigate inflation shocks, this niche operator still poses risks given its concentrated structure. Investors should sail into the Seaboard with eyes wide open.
Price per Share: ₹2,01,000
The Good
- Specialist Focus – AZO maintains industry-leading margins even through disruptive mobility transitions by dedicating itself solely to auto parts.
- Defensive Attributes – The demand for aftermarket parts is increasing due to the ageing fleet of cars that require servicing. This demand also helps buffer macroeconomic volatility.
- Shareholder Friendly – AutoZone’s aggressive stock buyback program provides ongoing support for its share price.
The Bad
- E-Commerce Lag – Online still comprises less than 20% of sales as AZO slowly adapts its brick-and-mortar footprint to shifting consumer preferences.
- Low Switching Costs – Consumers harbor a few qualms about substituting cheaper private label parts that are widely available. This caps the pricing power of AZO’s merchandise.
- High Leverage – AutoZone holds generous debt levels even after paying dividends, constraining financial flexibility during downturns.
The Verdict
Well-run with a leading industry position, AutoZone still requires careful steering to stay on course amidst digital disruptions.
Price per Share: ₹7,700
The Good
- Cash Cow Core – Google Search and YouTube maintain over 80% share in lucrative online advertising markets, funding Alphabet’s diverse tech bets.
- Reasonable Valuation – Trading below 20x forward earnings appears attractive, given its dominant position in secular growth markets with 20% projected top-line expansion.
- Fortress Balance Sheet – With US$125 billion in cash against only US$14 billion in debt, Alphabet holds dry power for withstanding uncertainty and making strategic acquisitions.
The Bad
- Regulatory Risks – Alphabet’s dominance and alleged privacy violations invite intensifying antitrust scrutiny across continents, threatening forced breakups or business model tweaks.
- Cost Creep – Though robust for now, continually rising data centre, talent, and content costs reduce margins over time.
The Verdict
Despite brewing regulatory storm clouds, Alphabet’s cash-generating engine still promises to power investor returns for the road ahead.
Price per Share: ₹1,17,000
The Good
- Steady Leadership – CEO Tom Gayner has deftly led speciality insurer Markel for three decades, balancing underwriting profits and investment returns.
- Long-term Focus – With 90% of policies annually renewed and limited quarterly disclosures, Markel avoids short-termism plaguing Wall Street.
The Bad
- Opaque Reporting – Just one annual shareholder letter limits visibility into ongoing operations and strategic direction.
- Rich Valuation – Trading at 1.6x price-book value runs far ahead of other insurers, implying lofty execution expectations already baked in.
The Verdict
Back Markel to beat markets over the long run – though investors should brace for some potholes pursuing this road less travelled.
Price per Share: ₹1,51,000
The Good
- Asset Light Model – By just aggregating travel inventory online rather than owning it, Booking avoids billions in liabilities sitting on hoteliers’ balance sheets.
- Network Effects – More bookers on platforms like Booking.com attract greater property selections, driving a self-reinforcing cycle and cementing its lead.
- Reopening Tailwinds – Consumers armed with savings and vacation days to burn portend a travel surge, with many bookings shifting online post-pandemic.
The Bad
- Commoditisation Risk – The rise of meta-search travel sites like Kayak, TripAdvisor, and Google Maps erodes the brand edge of online agencies.
- Many Alternatives – Airbnb, Expedia, and hundreds of hotel and airline loyalty programs compete for Share in the fragmented travel industry.
- Pandemic Relapse Possible – Covid flareups and geopolitical instability could trip up the travel recovery.
The Verdict
Though never cheap, Booking Holdings appears attractively priced for patient jetsetters amidst industry turmoil. The road ahead seems brighter.
Price per Share: ₹1,11,000
The Good
- Market Position – Cable One enjoys effective regional monopolies after the consolidation of rural cable providers lacking fibre or broadband capacities.
- Switching Difficulties – Remote locations with limited alternate connectivity options grant Cable One an enviable customer lock-in.
- Broadband Tailwinds – Growing data usage and connection speeds provide steady catalysts regardless of economic fluctuations.
The Bad
- Small Scale – With under 1 million subscribers, Cable One cannot match the cost efficiencies of the largest providers.
- High Leverage – Long-term debt that is nearly three times operating profits limits flexibility to reinvest.
- Regulation Looms – The broadband industry risks greater local oversight as internet access grows akin to a public utility rather than a discretionary service.
The Verdict
Cable One’s dirt road to riches appears narrow though well-paved for shareholders focused on the long haul. Worth hitching for the ride.
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