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Amazon and Alphabet are close to '$1,000 stock club', this could be a problem

Why Amazon and Alphabet’s $1,000 Stocks Could Be A Problem

posted onAugust 22, 2017
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Two business titans, Amazon and Alphabet might soon be able to make it to Wall Street’s ‘$1,000 Stock club’. As of right now, the two companies are just a few dollars away from the impressive mark. The e-commerce giant, Amazon saw its shares (AMZN) climb as high as $999 at their peak on Friday. Google owner Alphabet managed to top $996. Sounds like good news for them. But should investors be happy, when companies cross the $1,000 milestone?

Financial analysts say that the ‘trophy’ actually means little, and is rather there to impress people, without really having an impact on either the companies or market. Right now, stocks of only seven businesses are trading above this threshold, with Warren Buffett’s Berkshire Hathaway being the most expensive, at around $248,000. Three of them, however, create little trading activity. ‘Yes, it’s a clear sign of growth and success’, California economy professor Dan Seiver says.

Amazon has demonstrated an incredible 30% jump in 2017 and an even more astonishing 1,500% increase since 2009, when the bull market for stocks began. The e-retailer’s success has been possible not only thanks to its online stores, but also the technology it develops, like the Echo devices. In addition, the company is a major player in the thriving cloud computing field. Alphabet has dominated the online ad search space for years, leaving its opponents far behind.

However, there are some indications that rocketing stock prices might also be somewhat of a problem. One of them is, it shows that the U.S. stock market is actually quite vulnerable. Should these few companies that drive it see a decline in their shares, the market might be affected quite a bit. Big stock indexes like Nasdaq make their indexes based on companies’ market value. In other words, more valuable companies make have a bigger effect on the indexes, both when they grow or shrink.

Amazon and Google are currently sitting at number 2 and number 5 among the five biggest stocks in the Standard & Poor’s 500. These five stocks are responsible for approximately 33% of the large-company index’s 8% growth in 2017, according to index analyst at S&P Dow Jones Indices, Howard Silverblatt.

‘This is a clear indication that the market has become ‘much narrower’, says the president of Kaltbaum Capital Management, Gary Kaltbaum. ‘It also shows how much Alphabet and Amazon influence the stock indexes’. If the situation remains the same, it might be a reason to be concerned, because ‘the market eventually takes down the big dogs’.

Experts warn that investors, who buy ‘passive’ funds that monitor indexes, might be more exposed to tech, that they believe. ‘This trend could have major implications for investment’, says Michael Farr, president of Farr Miller & Washington, that manages money. ‘Some investors may think they are getting broad exposure when buying an ETF that tracks the indexes, but they are actually largely concentrated in a small number of stocks’. The fact that a few big companies drive the market might be demonstrating that the bull market is ‘aging’, he adds.

‘A bigger base of stocks in more industries indicates the ability of U.S. businesses to increase profits, as well the market strength in the economic forecast’. But when the value of a company’s stock gets very high, fewer people can afford to purchase it, making it less accessible for retail investors, market strategist Lindsey Bell says. She says that expensive companies like Amazon and Google should think about splitting their stocks, so they would be more affordable. Amazon actually already did this several times in the late 1990s, as well as some other companies.

In June 2014, Apple split its stock sevenfold, which decreased the price of each share from $650 to $92. This approach allowed to expand Apple’s share pool by seven times.

‘When I hear that a stock costs a thousand dollars, I always think it’s a bubble, despite the company’, says MUFG Union Bank chief financial economist Chris Rupkey. ‘Investors better hope that these two companies have their business models sustainable for the long run’.

Some investors, though, see how a less affordable share could actually be beneficial for companies. According to co-founder of Bespoke Investment Group Paul Hickey, it could mitigate price swings and volatility. ‘A higher stock would make it more difficult for ‘fast money’ to enter and exit the stock.

Source: usatoday.com