S&P Stocks Keep Getting More Expensive

As companies skip stock splits, individual equity prices are climbing

by Bernie Schaeffer

Published on Sep 11, 2018 at 8:42 AM

The stock market of 2018 has been defined, in many ways, by its extremes. The "swing for the fences" tone was set early on by the late-January record high for the S&P 500 Index (SPX)... which was followed, almost immediately, by the volatility "melt-up" that forced a complete reshuffling of the Cboe Volatility Index (VIX) derivatives complex. Then there was the ouster of General Electric (GE) from the Dow after more than a century of index membership, with its removal prompted by a historically unprecedented stretch of underperformance by the stock.

More recently, we've now seen two U.S. companies -- Apple (AAPL) and Amazon (AMZN) -- top the $1 trillion market cap barrier for the first time ever. At its record highs early last week, AMZN was trading at a lofty $2,050 per share, which means (based on Census Bureau data for 2016) it would take nearly two full weeks' worth of pay for the median U.S. household to invest in just one share of the company.

More broadly, Schaeffer's Quantitative Analyst Chris Prybal flagged last week that the percentage of S&P 500 stocks priced at $100 per share or higher has now reached 40%. This comes just 16 months after that percentage hit 30%, representing a marked acceleration from the three-plus years it took for this metric to rise, gradually -- with plenty of backing and filling along the way -- from 20% to 30%.

On its face, this development may strike some as a signal of frothiness or general over-exuberance (particularly juxtaposed against the highest percentage of bullish respondents we've seen in the weekly Investors Intelligence survey since January). From a purely practical perspective, higher share prices are often viewed as a "barrier to entry" for smaller, non-institutional investors, which in turn raises alarms about how long the bull market momentum can be sustained. But if this lack of "accessibility" to a sufficiently wide audience of investors is a concern for corporations, it's difficult to tell by what appears to be a near-complete lack of interest in stock splits.

Prybal's review of S&P 500 activity shows only three stock splits so far in 2018 for index components, putting this year on pace for the lowest number of S&P splits since the two recorded in 2009 (best remembered as the year of the post-financial collapse bear-market bottom). Moreover, Birinyi Associates data indicates that this shift away from stock splits has taken place in the form of a steep downtrend from the heights of around 80 to 90 per year achieved in the late 1990s.

Yet, given that the major market benchmarks have attained new record highs in 2018 even as stock splits have fallen suddenly and drastically out of fashion in recent years, it would seem that rising share prices for individual stocks are no longer incompatible with a continued bull market. The "average" investor is savvier than ever about options and exchange-traded funds (ETFs), which provide exposure to a wide swath of high-priced equities for premiums that are often a fraction of the cost of the underlying. And per Options Clearing Corporation (OCC) data, both equity options and ETF options volume have been rising -- which means a non-trivial portion of the daily share volume in these "high dollar" stocks is linked to the derivatives trades put on by these "low dollar" investors.

While we may yet discover that the market won't bear a full S&P 500's worth of Amazon-priced stocks, it would seem for now that retail-level investors have deconstructed some of the former barriers to entry -- which means the accompanying chart may simply be a sign of the evolving stock market.

spx stocks over 100 per share

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 9.

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