Big-Time Splits Are Usually Big-Time Opportunities
Stock splits have been around for a long time, but June brings a couple of whoppers – including one of the biggest in history.
The data is clear that stock splits can be big opportunities for investors.
Coca-Cola (KO), one of Warren Buffett’s main holdings, has split 11 times in the last 105 years. If someone bought one share of KO in 1919 when it debuted and willed that investment to future generations, that single share would now amount to 9,216 shares. That $40 investment would be worth more than $580,000.
The first big split this month was Nvidia (NVDA), which split 10-for-1 after last Friday’s close. That’s the sixth split in NVDA’s 25 years as a public company, and it’s the biggest one so far.
Shareholders received nine additional shares for each one they owned. Each share instantly became 10 shares. In turn, the per-share price became one-tenth what it was before the split.
Anyone not paying attention must have had quite the jolt Monday morning when they saw the price down from more than $1,200 per share on Friday to $120.37.
If that seems like an enormous difference – and it is – consider what’s coming with Chipotle Mexican Grill (CMG).CMG splits50-for-1 on June 26. That’s one of the biggest stock splits in the 232-year history of the New York Stock Exchange.
Based on CMG’s current price around $3,200, the new price after the split would be roughly $64 per share.
That’s a massive difference.
Why would a company do that? Nvidia said it best – “to make stock ownership more accessible to employees and investors.”
And splits usually result in higher prices. That means they are often buying opportunities.
We dove into the data, and you might be surprised by what we found…
Splits are Clearly Bullish
My friend, business partner, and fellow TradeSmith analyst, Luke Downey, is an expert at what we call signal studies.
He can take a certain event, plug in the data from that event or trend, and find out how many times it has happened before and whether past occurrences “signal” what to expect.
Luke went back to 2013 and found 24 notable splits and then tracked each of the companies’ returns over multiple periods. By notable we mean all-star companies with high share prices like Netflix (NFLX), Nike (NKE), Monster Beverage (MNST), Tesla (TSLA), Amazon (AMZN), and Alphabet (GOOGL).
After their splits, these stocks were up 2.8% on average one month later, 5% three months later, 11.9% a year later, and a juicy 37.3% two years later.
Here’s the complete dataset:
(Disclosure: Luke Downey owns shares of NFLX, EW, NKE, TSLA, GOOGL, LRCX, and CMG.)
Some of that is clearly a lower share price attracting more investors, but some of it is also the quality of the company.
Duds generally don’t split. They have no reason to, and they may not even be able to. If anything, failing companies do what’s called a reverse split – shareholders end up with fewer shares but at a higher price per share. This can artificially raise per share prices to avoid delisting or make them eligible for funds to buy. (Some funds are prohibited from owning penny stocks or extremely small stocks).
That tells us two things: The best stocks outperform (which is always true), and dud companies don’t split. They have no reason to.
Stock splits are the province of successful companies with rising share prices. Six of the “Magnificent 7” stocks have split at least once in their history. Microsoft (MSFT) leads the way with nine splits.
Can you guess which Mag 7 company has not split?
Meta Platforms (META).
And can you guess which stock is among those that investors think might soon split?
Yep… META.
In Power Trends+, Luke highlighted two other highly rated companies that he identified are prime candidates for a split. One was Broadcom (AVGO), and right on cue, the company announced a 10-for-1 split yesterday in its earnings report. (You can watch the video here.)
Stock splits usually bring additional profits – the continuation of an already strong trend… but at a lower price per share.
Let’s see if that looks to be the case for this month’s big splits…
Does the Quantum Score Back Up the Split?
We’ll start with the best: Nvidia (NVDA).
It’s the poster child for AI investments. Its chips are in high demand. And its shares have zoomed nearly 225% in the past 12 months.
That’s why it was a $1,200 stock until Monday.
NVDA is already up more than 30% in just three weeks since announcing the split as part of its first-quarter earnings report. Of course, stellar earnings were the primary catalyst.
My system has detected four Big Money buy signals in those three weeks. The combined fundamental and price strength results in a stellar 84.5 Quantum Score for Nvidia.
Source: TradeSmith Finance and MAPsignals.com
That slides in just under the peak of what I consider the primo buy zone of 70 to 85. The data indicates higher prices are likely over time, but that 91.2 Technical Score also indicates a higher likelihood of a near-term pullback.
Technical Scores over 90 are my Quantum Edge system’s version of potentially overbought. Theoretically, a stock’s technicals could rate 100, but that’s incredibly rare. More importantly, the only place to go from there is down.
My NVDA data and analysis correlates with general stock split data, meaning higher prices are likely for this AI behemoth.
Chipotle Mexican Grill (CMG) is a little fuzzier, but it is a solid company whose shares have climbed more than 50% in the last 12 months to that monstrous price of $3,200.
Chipotle is unquestionably a large-cap stock valued at $90 billion, but only about 265,000 shares trade hands on average each day. That may change after the split dramatically lowers the price. For comparison, one of my recommended stocks in TradeSmith Investment Report has a similar valuation at $91 billion but average daily volume tops 900,000 shares.
CMG’s Quantum Score is 69, which is just about in that target buy zone that starts at 70.
Source: TradeSmith Finance and MAPsignals.com
Shares are up more than 40% so far this year, and they are now bumping up against short-term resistance. They have traded in a range the last three months, but the Technical Score remains solid at 67.6. The low average volume does ding the score, as does the lack of Big Money buy signals.
The fundamentals are solid at 70.8. Sales and earnings growth over the last one and three years ranges from decent to strong, and estimates are for earnings to grow 24% this year and 20% next year. That’s healthy. Valuation is a little steep with shares trading at 57.5 times this year’s expected earnings.
CMG may not qualify as one of the best opportunities out there, but it sure looks solid. I do expect higher prices based on both its Quantum Score and that incredibly big split in just two weeks.
I recommend you add stock splits to your list of factors to look at when analyzing stocks. When high-quality companies split, odds are good there’s money to be made. The best firms on planet Earth routinely divide their shares to attract investors of all wealth levels.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
Disclosure: On the date of publication, Jason Bodner held a position in Nvidia (NVDA), Chipotle (CMG), Alphabet (GOOGL), Lam Research Corporation (LRCX), Edwards Lifesciences Corp (EW), and Nike (NKE) mentioned in this article.