The Connection Between High Stock Prices and Stock Returns

Look at the prices of the most familiar publicly traded companies, names like Facebook (FB), Amazon.com (AMZN), Apple (AAPL), and Tesla (TSLA). All of them are well over $100. It didn't used to be like this. Stock splits have declined extensively over the past few years leading to a high proportion of stocks trading in the triple digits.

Stocks Over $100

The chart below shows the percentage of optionable stocks that have prices above $50 and $100. Currently, just over 13% of optionable stocks trade above $100. At the market top in 2007, the percentage did not even reach 4%. This week I'm doing a simple but interesting study: How have low-priced stocks performed compared to high-priced stocks?

Returns by Stock Price

For the study I went back to 2012 and found stock quarterly returns based on the price of the stock. The price of the stock is the price at the beginning of the quarter and it's not adjusted for splits. The left column shows the stock price range followed by summarized return data.

The first thing you'll notice is stocks in the lowest price range (less than $2.50) average a 55% 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 exhibits what is known as survivorship bias. That means it is only showing data for stocks that have survived. The data disregards companies that went broke, which obviously is 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.

After that, the main observation that I had was the difference in volatility of the lower-dollar stocks and higher-dollar stocks. I'm measuring volatility by the average positive and average negative. Stocks trading in the single digits were up on average by more than 20%. When they were negative, they were down an average of more than 15%. Looking at the data at the bottom of the table (higher-dollar stocks), those stocks average a gain or loss of about 10%. So, higher-dollar stocks typically move less in magnitude. Higher-dollar stocks tend to have bigger market caps, which tend to be less volatile.

One last observation is that the higher-dollar stocks have been more likely to be positive. At the top of the table where the low-dollar stocks are, the percent positive is right around 50%. The last few brackets in the table, where the high-dollar stocks are, have a percent positive of around 60%.

Quarterly Stock Returns Based on Price

This next table is just like the one above except it only shows data through the first three quarters of this year. Again, those low-dollar stocks have an average return that seems too good to be true and that's because it is. Disregard that group of stocks.

The high-dollar stocks through the first three quarters of the year have outperformed. Stocks that began a quarter priced above $300 have returned an average above 5% for the quarter with 75% of the returns positive. These are the highest values in the table (again, ignoring that first bracket).

A little more general, stocks in the triple-digits average about a 5% quarterly return with about 70% of the returns positive. Stocks in the single-digits show a percent positive right around 50%. While stocks between $5 and $10 average about a 4.8% return, those from $2.50 to $5 average a return of less than 2%.

The high-dollar stocks seem to be a relatively reliable group of stocks. Below, I list some of the more popular companies trading above $300.