When people go shopping for most things, human nature typically invokes an adverse reaction to items with higher price tags. At the very least, expensive stuff usually triggers a more cautious, skeptical approach to the buying process.
Unfortunately, when you’re searching through the market’s top stocks to find the next addition to your portfolio, it’s not quite that simple.
In fact, share price alone really means nothing, at least when taken apart from dozens of other important variables like growth rates, book value, earnings per share, number of shares outstanding, and even less-tangible factors like brand strength and competitive moats.
On the upside, once we’ve established that share prices by themselves are irrelevant, a world of new possibilities opens up in your quest for the world’s top stocks.
Here are three such stocks, then, which each boast unnecessarily intimidating three-digit price tags:
The king of streaming
First up, consider Netflix, Inc. (NASDAQ:NFLX), which currently struts around with a share price north of $214.
But don’t let that scare you away from this top stock; the video specialist is coming off a massive quarter, which lifted its shares by more than 20% — and with good reason. After Netflix, Inc. (NASDAQ:NFLX) added more than 3 million subscribers, including 2 million here in the U.S., and another million from its fast-growing international market, it brought Netflix’s total number of streaming subscribers to 36 million.
Netflix, Inc. (NASDAQ:NFLX) isn’t resting on its laurels, either; just last week, the company announced it was bringing its streaming service to the Netherlands by the end of this year.
All told, Netflix, Inc. (NASDAQ:NFLX) absolutely crushed analysts’ earnings estimates by more than 70%, with adjusted quarterly net profit of $0.31 per share. However, with shares of Netflix trading at an incredible premium at more than 520 times last years’ earnings, does it really deserve to be called one of the market’s top stocks?
In short: I think so.
Remember, fellow Fool Anders Bylund recently pointed out that Netflix, Inc. (NASDAQ:NFLX) looks downright cheap, despite its high price to earnings ratio, thanks largely to the market traction it’s building as a leader in the streaming video space. What’s more, given Netflix’s enormous growth potential, this top stock’s valuation looks much more attractive when held up to next years’ earnings estimates with a forward P/E ratio just below 70.
Of course, that’s still not “cheap” by any means, so Netflix definitely isn’t for the squeamish. But, if analysts’ estimates once again prove to be too low, the payoff could be huge for early investors.
Burritos and beer… with integrity
That might sound like an oxymoron, but it’s no mistake that shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) currently trade at more than $360 per share.
Though Chipotle Mexican Grill, Inc. (NYSE:CMG) does look a little rich at just under 40 times last year’s earnings, and 28.4 times next year’s estimates, this top stock has risen more than 21% so far in 2013 on the heels of another absolutely delicious quarterly performance.
But let’s dig into Chipotle Mexican Grill, Inc. (NYSE:CMG)’s most recent quarter to get an idea of what makes it tick: Quarterly revenue not only increased 13.4% year over year to $726.8 million, but net income also rose 22.2% from the same year-ago period, to $76.6 million, helped both by 48 new restaurant openings during the quarter and the company’s efforts to increase its operating margin to offset higher food costs.
Going forward, Chipotle management assured investors they should be able to deliver at the high end of existing guidance for opening between 165 and 180 new locations by the end of 2013, with a special focus on physically smaller restaurants, which allow for lower occupancy and operating costs.
In addition, thanks to the fact that Chipotle Mexican Grill, Inc. (NYSE:CMG) spent $51 million last quarter to repurchase around 164,000 shares at an average of $310 each, its quarterly earnings per share rose 24% from the same year-ago period, to $2.45. What’s more, Chipotle Mexican Grill, Inc. (NYSE:CMG) still has around $149 million remaining in its current share buyback program.
Bottom line: If this top stock were a giant burrito, there’s no reason investors shouldn’t want to clean their plates.
The mini-Berkshire
Finally, I think any long-term investor would be wise to buy Markel Corporation (NYSE:MKL), another top stock which has returned more than 6,100% since going public in 1986.
But how much higher can it go? After all, with a current share price of nearly $525, Markel Corporation (NYSE:MKL) certainly appears to be the most “expensive” top stock I’ve named so far. However, this insurance specialist just so happens to emulate Warren Buffett’s wildly successful diversified business model, which helped him grow Berkshire Hathaway Inc. (NYSE:BRK.A) into the $186 billion behemoth we know and love today.
And Markel, for its part, just posted its own awesome quarter, and currently sports a much smaller $5 billion market capitalization, leaving it plenty of room to build its business both organically, and through the acquisitions of other comparatively small, profitable companies.
Remember, though, price-to-book value is generally the most effective metric for valuing financial holding companies like Berkshire Hathaway Inc. (NYSE:BRK.A) and Markel. So how does Markel stack up?
Trading at 1.19 times book value, I’d say pretty darn well — especially when we note that’s below Buffett’s self-imposed limit of 1.2, under which, he told investors, he would be willing to buy back shares of Berkshire. For reference, the Class A shares of Berkshire Hathaway (which cost nearly $170,000 apiece) currently trade for more 1.4 times Berkshire’s own book value.
Then again, Markel doesn’t exactly command the same “Buffett premium” that Berkshire does, but I’ve already asserted Markel’s management team is as good as they come.
In the end, then, if Markel can’t be considered one of the Wall Street’s top stocks, I don’t know what can.
The article 3 Top Stocks With 3-Digit Price Tags originally appeared on Fool.com and is written by Steve Symington.
Fool contributor Steve Symington owns shares of Markel. The Motley Fool recommends Chipotle Mexican Grill, Markel, and Netflix. The Motley Fool owns shares of Chipotle Mexican Grill, Markel, and Netflix.
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