Low-Priced, High-Priced Stocks: What Yields Better Returns?

Stock splits aren't as common as they used to be

Senior Quantitative Analyst
Oct 13, 2021 at 8:00 AM
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Look at the prices of the most familiar publicly traded companies -- Facebook (~$320), Amazon (~$3,250), Apple (~$140), Netflix (~$620), Tesla (~$800) and Google (~$2,700). All of them are well over $100, even AAPL despite a relatively recent four-for-one stock split in August of 2020. It didn’t used to be like this. Stock splits have declined extensively over the past several years leading to a high proportion of stocks trading in the triple-digits. The chart below shows the percentage of optionable stocks that have prices above $50 and above $100. Currently, around 15% of the stocks trade above $100. At the market top in 2007, the percentage did not even reach 4%. Consider the S&P 500 Index: a whopping 55% of the stocks are above $100.

This week I’m doing a simple but interesting study. How have low-priced stocks performed compared to high-priced stocks?

Iotw Chart 1 1012

Returns by Stock Price

I went back to 2016 and found quarterly stock returns based on the price of the stock at the beginning of the quarter. The prices are not adjusted for splits so it’s the actual price investors had to pay for that stock at the time. The left column in the table below shows the stock price range followed by summarized quarterly return data.

The first thing you’ll notice looking at the table is the lowest price range (less than $2.50) averages a 112% return per quarter. Do not believe that because there is a major flaw in this figure. The stock database that I’m using, unfortunately, only has data for actively trading stocks. The analysis demonstrates survivorship bias. That means it is only showing data for stocks that have survived. The data disregards stocks that went broke, which returns a 100% loss. Naturally, stocks are very low priced just before going bankrupt so in that low-dollar price range you’re essentially throwing out the worst performers. In other words, do not buy low dollar stocks based on this analysis.

Still, investors probably would have been best off investing in lower dollar stocks over this time frame. Stocks between $2.50 and $5 averaged a 10% quarterly return and stocks between $5 and $10 averaged a return above 6%. As you move down the table that average return declines until you hit the highest dollar stocks which are those above $300. In a bull market, it isn’t surprising that the low dollar stocks perform the best. The lower priced stocks tend to be much more volatile so when most stocks go up, the more volatile stocks will go up the most.

Let’s look at the volatility of the brackets. I’m measuring volatility by the standard deviation of returns. Stocks trading in the single digits showed a standard deviation well above 40%. Looking at the data at the bottom of the table (higher dollar stocks), those stocks have a standard deviation that’s about half that. Higher dollar stocks typically move less in magnitude. They tend to have bigger market caps which tend to be less volatile.

One last observation is that the higher dollar stocks were more likely to be positive. Let’s disregard the lowest dollar stocks because of the survivorship bias I mentioned above. The lowest dollar stocks had the lowest percentage of positive returns. The lower-dollar stocks had a percent positive around 51-54%. As you move toward higher priced stocks, the percentage steadily increases until the highest dollar stocks were positive at a rate of about 61%.

IotW Chart 2 1012

I was curious what this data looked like in a down market. To look at the last negative quarter, you must go all the way back to the first quarter of 2020. The table below shows the returns for each price bracket in that quarter. Survivorship bias is still prevalent as the lowest priced stocks averaged a return above 40% for the quarter. Again, as you might expect, the highest priced stocks would have lost you the least amount of money. Stocks priced above $300 averaged a loss of 14% during the quarter, which was significantly better than the next best bracket, the $100-$300 range, in which the stocks averaged a loss of 22%.

IotW Chart 3 1012

The high-dollar stocks seem to be a relatively reliable group of stocks. Below is a list of the more popular S&P 500 Index (SPX) companies trading above $300.

IotW Chart 4 1012

 

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