By Ryan FuhrmannPublished 01/12/2011 – 14:00
For the most part, the price of a stock does very little in telling investors whether it is a good value or not. Any astute investor will do his or her best to estimate their own fair value for a stock. However, in certain circumstances, an extremely high stock price can be quite telling.
The best example comes from Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ). Its Class A shares trade at more than $121,000 a share and easily represents the highest share price for any stock out there. According to Warren Buffett, the high share price is meant to reduce shorter-term speculative trading and encourage loyal shareholders planning on holding the stock for a very long time. (And the only reason the ‘B’ shares were split were to facilitate Berkshire’s acquisition of Burlington Northern Santa Fe.)
The signal sent by a high share price can be that management is committed to growing its business over the long haul and is not willing to sacrifice long-term profitability for short-term results, such as by holding off on paying a bill to make sure it beats quarterly profit expectations. Again, Berkshire is the paradigm case for striving for long-term shareholder value. Here are four other firms with high share prices that share similar views on how to run their businesses and treat shareholders.
1. Markel Insurance (NYSE: MKL )
Business: Specialty insurance
Forward P/E: 24.6
Keen investors in Berkshire Hathaway are fully aware that the executive management team at Markel Insurance is out to emulate the Oracle of Omaha. The company even presents during Berkshire Hathaway’s annual shareholder meeting in Omaha. Markel is known for taking a patient approach to managing its insurance businesses and investment portfolio using the premiums it collects from customers. The company has a ways to go to match Berkshire’s share price, but it is close to reaching $400 a share. Shareholders have done very well over the years and Markel has been able to grow sales and earnings at more than 10% annually in the past decade.
2. Fairfax Insurance (OTC: FRFHF.PK)
Business: Property and casualty insurance
Forward P/E: 8.3
Like Markel, Fairfax’s shares are also hovering around the $400 level and focus on insurance. Similarities to Berkshire Hathaway are also prevalent: CEO Prem Watsa has been referred to as “the Warren Buffett of Canada,” given the firm’s strong track record in managing its own investment portfolio. Book value has grown by more than 20% for more than a decade and serves as another example of how focusing on long-term value creation can be quite lucrative for patient and loyal shareholders.
3. International Business Machines (NYSE: IBM )
Business: Diversified technology
Forward P/E: 12.9
Finally, moving away from insurance and taking a look at a company in another industry, the company known as “Big Blue” sports a high share price of nearly $150. This is a high price in absolute terms and compared with other tech rivals. Just as with Berkshire, this is meant to encourage a more patient shareholder that is less likely to jump in and out of the stock. IBM’s track record is impressive: earnings have grown by more than 9% in the past 10 years. The technology industry may be fast paced, but IBM has stuck to a consistent strategy of moving into higher profit software and IT services for a number of years now, and the moves are paying off big for investors.
4. WW Grainger (NYSE: GWW )
Business: Industrial products and services
Forward P/E: 20.8
With a share price hovering close to $140 a share, maintenance equipment maker WW Grainger has among the highest share price levels of its peers. Its long-term focus has allowed earnings  to improve more than 11% on average during the past decade. In addition to a loyal shareholder base, Grainger’s customers are loyal and choose it over rivals, given the firm is well-run and able to pass low costs onto its clients.
Action to Take —> An occasional screen of stocks above the $100 share price level could be a worthwhile endeavor for uncovering companies that have treated their shareholders well over the years. It can also be indicative of above-average growth prospects ahead.
A high share price by itself is not proof-positive that a company’s management team is committed to Warren Buffett’s philosophy of stable, consistent shareholder returns over many years, but it’s usually a good indicator. The stocks mentioned above are all good examples of this and are good candidates if you’re looking for these qualities in a long-term holding.