High priced stocks

For much of the market's history there was a stigma attached with buying an odd lot, that is less than 100 shares of a given stock.  In some markets like Japan investors still cannot trade in anything smaller than a round lot.  Round lot limitations create high hurdles for investors.  If an investor is required to purchase a round lot when a company's price is $250 a share they would need to have $25,000 to establish a position.  Minimum purchase sizes lock out smaller investors, or investors who don't wish to commit a sizable amount of capital up front.  They also limit investors from trimming their position size as the price appreciates.  Owning a single round lot in Japan means buying all at once and selling all at once.

When the US markets moved from round lots to enabling odd lots to be easily purchased (especially online) the dynamics of the market changed.  An investor could suddenly purchase 4 shares at $250 for a $1,000 investment rather than 100 shares at $250 for a $25,000 investment.  Companies didn't pay as much attention to keeping their share price low.  Even higher priced stocks such as Google were easily purchasable online in odd lots.

Even though round lots aren't required or preferred anymore there is a strange phenomenon that still exists at the fringe of the market.  Companies with unusually high share prices.  The flagship company for this behavior is Berkshire Hathaway with a single A share trading for $219,000.  The cost of a nice house in most areas of the country!

Lower priced shares offer investors more flexibility with their holdings.  Maybe an investor needs to sell half of their position to fund a new position, this isn't possible when a position consists of a single high priced share because while the market accepts odd lots, it doesn't accept fractional shares.

The lack of flexibility and optics of a high share price offer investors an opportunity.  If most of the market disregards companies with high prices then it's likely that companies with high prices might be selling for less compared to a lower priced company.  The price per share of an investment shouldn't matter, yet it does.  I have seen over and over that companies with high prices sell at lower multiples compared to companies with lower share prices.

Some of the stigma is due to the media.  In the Wall Street Journal, or other financial media a journalist will make special mention of a high share price as if it's something special and unobtainable for most investors.

I've never taken the time to look at every company trading above $1,000 per share, but for the few I've looked at I've come to the conclusion that if an investor were to limit their portfolio to only companies trading for more than $1,000, or even $500 a share they would crush the market.

Right now there are 83 (the number is potentially skewed high due to some dark names) companies trading for more than $1,000 per share.  It appears the majority of these are dark companies where an investor needs to own a share before they can get an annual report.  A number are banks, and some are even fully reporting companies such as Seaboard (SEB).

It probably won't be a surprise to many long time readers, but I'm familiar with about 40-50% of the names on the list.  These are classic pink sheet names such as, Avoca, Queen City, CIBL, LICT, LAACO, Merchants National, Beaver Coal, Hershey Creamery, Tower Properties and on.  The names I'm familiar with are indeed good values.  There are compelling investment cases to be made for all of the companies I mentioned above.

The caveat to searching for stocks only trading above an arbitrary high price is that information might be unreliable, and it might be hard to obtain.  I found a few companies on the screener list that have had their bid walked up significantly over the years, but it looks like shares haven't traded in eons.

This post might just be a very long way of saying that investors who look in corners of the market neglected by other investors will likely find an abundance of opportunities compared to the market at large.  In terms of high priced stocks this is simply a behavioral phenomenon, there is nothing different between a company with 1,000,000 outstanding shares at $10, or one with 10,000 outstanding shares at $1,000.  Yet investors treat the companies differently, and therein lies the opportunity.

Polonia Bank; small, undervalued and five activist investors involved

I recently wrote an article at Seeking Alpha detailing Polonia Bancorp (PBCP).  Polonia is a small Pennsylvania bank with five activist bank investors on their shareholder register.

Here is an excerpt from the post:

The acquisition valuation model is simple, but it gives a good estimate of what an acquiring bank might see in a small and unprofitable bank. It's also likely that this is what the five activist hedge funds see in Polonia bank as well.

Polonia's proxy statement shows that Stilwell Value Partners, Homestead Parners, Maltese Capital Holdings, PL Capital, and Lawrence Seidman collectively own 38.4% of the company. All of these funds are known to invest in mutual conversion IPO's and then actively "encourage" management to sell the bank to a larger bank.

The company's management owns 11% of the bank, and executive management is nearly retirement age. Many bank executives look at a sale as a way to fund their retirement. They worked hard for years and now it's time to sell and play golf.

Investors have an opportunity to invest along side well known bank activist hedge funds that will do the heavy lifting required to convince a bank's management to sell.

You can read the full write-up here. 

On a related note some of you might be wondering why I've decided to write about banks on Seeking Alpha instead of on Oddball Stocks.  The reason for this is I don't want Oddball Stocks to become a banking blog.  I've decided to write a majority of my bank related posts on either the CompleteBankData Blog, or on Seeking Alpha, with a few posts mixed in here and there.

If you're looking to drink from the firehose of bank write-ups I'm going to be starting a new project soon on the CompleteBankData Blog.  I will be covering every bank in the KBW Regional Bank Index by writing up and valuing one bank a day.

Interested in learning more about banks? Buy my book The Bank Investor's Handbook (Kindle and paperback available)

Disclosure: Long Polonia