Don’t Let This Stock-Split Myth Cost You Money

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If you’ve been around the markets for any amount of time, I’m sure you’ve run into one glaring fact…

Your favorite stocks often sport high share prices.

A case in point is semiconductor stalwart NVIDIA Corp. (NVDA), which is trading at about $1,130 as of Monday afternoon… after ripping more than 3,265% in the last five years.

Another example is a company I’ve owned for years, Chipotle Mexican Grill (CMG). That’s reached an uber-high price of $3,050 as of Monday afternoon.

We can even take it all the way up to Berkshire Hathaway’s A shares: On Monday, those were trading around $625,000 a pop (up from $1,290 in 1986!)

These rich prices often deter retail investors from buying in… With many instead choosing to buy a lower-priced alternative or “wait for a pullback” that may never come.

I get the temptation… but this is completely the wrong move.

The fact is, when a stock has a high share price, it’s for a good reason: People buy it. These companies sport incredibly profitable businesses… And as investors pile in, their share prices jump higher and higher, year after year.

That makes a high share price the hallmark trait of a superior business.

However, the top executives at these companies have learned that unattractively high prices often make the mom-and-pop crowd hesitant to buy their stock.

To combat this, companies can split their shares to bring the prices down to a more digestible level.

Lots of analysts like to claim that share splits have zero economic value to a current shareholder. They point out that one share of stock trading at $200 is the same as two shares valued at $100.

They’re right about that, but they’re dead wrong thinking share splits have no value.

There are two very good reasons companies split their shares, each of which is a potential boon to a stock’s price:

• First, as I said earlier, a lower stock price will create a “value” proposition for retail investors who shun high stock prices.
• Second, and possibly more important, these lower share prices are a way for a company to incentivize employees to buy into the company.

Wall Street has recently begun a flurry of notable stock splits, NVIDIA and Chipotle included. So today, we’re going to answer a burning question: Are stock splits a bullish omen?

As always, we’ll let data and history decide… and chances are you’ll be surprised by our findings.

Two Major 2024 Stock Splits and Wall Street’s Reaction

As markets power to new heights, stock prices have entered the stratosphere. Many best-of-breed companies have stock values well north of $1,000 per share.

Many of those firms have recently announced stock splits. And we’ve seen share prices lurch higher after those announcements.

Just check out NVDA’s 10-for-1 forward stock split planned for June 7, for example. NVIDIA announced this on May 22 along with stellar earnings, which easily goosed the shares higher:

The same Wall Street blessing happened after Chipotle announced on March 19 that it plans to do a 50-for-1 share split on June 25. This was one of the largest stock splits in history, happily celebrated by investors.

With the initial reactions being positive, let’s now dive into today’s study.

Are stock splits bullish over the medium-to-long term?

Let’s find out…

Forward Stock Splits on Great Companies Are Very Bullish

To try and answer whether stock splits are a good omen, I decided to look back at some of the most memorable splits.

To be fair, there is some bias to this list. I selected names that were well-known at the time and had a stellar business profile – similar to NVIDIA and Chipotle.

I’m talking about all-star companies like Netflix, Nike, Monster Beverage, Tesla, Amazon, and Google parent Alphabet. Remember – for the most part, the highest-quality companies are the ones that have this high share price “problem.”

Since 2013, I found 24 notable splits. I tracked each of those companies’ returns on both short- and long-term time frames and laid them out for you below, along with the three upcoming splits.

Following share splits, this basket of stocks:

• Added an average of 2.8% gains a month later
• Climbed 5% three months after
• Posted a market-beating jump of 11.9% over the next 12 months
• And ripped 37.3% in the following 24 months

(Disclosure: I own shares of NFLX, EW, NKE, TSLA, GOOGL, LRCX, and CMG.)

For a few of the recent stock splits above, like TSLA, MNST, and CELH, we’re still waiting to see their long-term performance.

But the broader trend is clear. Share splits in high-quality companies are a bull signal. And much of this is likely due to retail demand surging and company employees jumping in on the lower prices.

Either way, you as an investor should view stock splits as a sign of good fortune for a company. The best firms on planet Earth routinely divide their shares to attract investors of all wealth levels.

So be on the lookout for best-of-breed stocks splitting their shares… and buy them! Odds are this easily overlooked transaction holds the long-term winning formula.

Regards,

Lucas Downey
Contributing Editor, TradeSmith Daily