The Warren Buffett Effect on Stocks

The number of stocks undergoing splits has drastically fallen, making SPX stocks more expensive than usual

by Chris Prybal

Published on May 5, 2017 at 2:19 PM
Updated on May 8, 2017 at 2:46 PM

At present, a whopping 30% of S&P 500 Index (SPX) components, or 150 of the 500 stocks, are priced over $100 a share -- an all-time record. The previous record was in March 2000, at the peak of the tech rally, with just 9.5% of SPX stocks priced in triple-digit territory. During the real estate boom, in October 2007, the percentage peaked at 9.2%. So, what's behind this phenomenon? Have stocks become "Veblen goods," or is this the Warren Buffett Effect? 

SPX stocks above 100 dollars

Class-A shares of Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A) have been the most expensive on record for quite some time. They now fetch nearly $250,000 per share. No need to split your stock, so says Warren, whose IBM stake is moving markets today. And Amazon stock and Google parent Alphabet Inc (NASDAQ:GOOGL) fetch more than $900 apiece. A few other high-flying equities include Priceline Group Inc (NASDAQ:PCLN), trading north of $1,900, and Tesla Inc (NASDAQ:TSLA), which is above $300. Why split, what's the point?

Household ownership of equities has been declining for years, so corporate insiders see no need to "feed the masses" with lower-priced shares via stock splits. In the mid-to-late 1980s, the number of S&P 500 companies issuing stock splits was above 100, per Bloomberg Businessweek; it's been fewer than 20 since the financial crisis, though Apple Inc. (NASDAQ:AAPL) recently underwent a 7-for-1 stock split.  Still, companies aren't that interested in splitting their shares, as they were previously. Big-time money flows from institutions, who have less of a need or care for low-priced equities.They just want to move capital, not buy fractional shares like retail clients.

Wikipedia defines "Veblen goods" as "types of luxury goods, such as expensive wines, jewelry, fashion-designer handbags, and luxury cars, which are in demand because of the high prices asked for them. The high price makes the goods desirable as status symbols ... a decrease of the price of Veblen goods would decrease demand for the products."

So, from a broader economic perspective, equities have become "status symbols," or Veblen goods, as I'm pretty sure that a family living "paycheck to paycheck" isn't so interested in buying $900/share Amazon stock -- that is two weeks' of pay for some. And per a recent Bankrate study, 60% of Americans don't have $500 in savings.

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