A closer look at how stock splits tend to impact future trading
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If you’re a retail investor without a ton of capital to play around with, it’s disheartening to miss the train on an outperforming stock because it was out of your price range. Even though options can eliminate this pitfall due to their reduced exposure, oftentimes the massive share price also correlates to expensive premium, leaving both investor and option trader on the sideline while the grownups play.
Despite the large cap dominance in the last 18 months, stock splits have become an underrated storyline in 2024. Household names like Nvidia (NVDA), Broadcom (AVGO), MicroStrategy (MSTR), and Chipotle Mexican Grill (CMG) all have announced and executed stock splits in the last eight months. What have these splits done to their technical backdrops, and who could be next?
A stock split is simply a corporate action in which a company divides its existing shares into multiple shares. The shares will be worth half as much as they were before the split, but there will be twice as many shares. So if each share was worth $100 before the split, then each share will be worth $50 after the split. However, the value of the company will remain the same. This is because a stock split does not add any new value to the company, it simply divides the existing shares into multiple shares. It also does not take away any value from the company. It is simply a way to divide the shares among more shareholders. Companies will announce stock splits to either appear more affordable to smaller investors or maybe increase liquidity, but regardless, the endgame is to ultimately appear more attractive to investors. However, just because investors are able to get a better price, doesn’t necessarily guarantee that the price will go up.
You may recall we correctly nailed Super Micro Computer’s (SMCI) stock split back on July 23, two weeks before the semiconductor giant announced its split on Aug. 6. Beyond that victory lap, Schaeffer’s Senior Quantitative Analyst Rocky White analyzed the fallout from stock splits shortly after Nvidia’s announcement on May 22. The overall takeaway from White’s data (below), was that stock splits tend to underperform the S&P 500 Index (SPX) across various timeframes going forward. In White’s own words: “The two weeks immediately following a split, the 240 stocks (that split) averaged a gain of 0.44%, with just under half beating the SPX. The six-month average return slightly outperforms the SPX (6.6% to 5.4%), with again just under half beating the index.”
White goes on to conclude, using NVDA as the baseline, that the bigger the market cap and share price, the more the stock tends to underperform the broader market. Note the negative numbers around tech powerhouses Alphabet (GOOGL), Amazon.com (AMZN), and Apple (AAPL). This could spell trouble for AVGO, with its market cap of $691 billion and pre-split price above $1,600. But it could mean MSTR, SMCI, and CMG –three recently split stocks that were above $400 but had smaller market caps – may encounter a different trajectory.
Per the table below, MSTR and CMG have already encountered technical weakness since announcing their splits earlier this year. Some of this can be attributed to the broad market selloff in late July and early August, but it’s a trend to monitor, nonetheless. NVDA, meanwhile, keeps trucking, while Broadcom has been essentially static. The connective tissue between all four is the solid year-to-date and year-over-year gains. Bookmark this page and come back in a year, and I wonder what those long-term results would be.
Between White’s data and the above table, Morningstar underwent a similar study earlier in June. This line stood out: “To some degree, a stock split adds to positive market sentiment, as it indicates management is confident in the underlying growth dynamics of their business,” says Morningstar chief US market strategist Dave Sekera. He added, “Yet a split is more like window dressing to not scare off retail investors looking at high-price stocks who don’t understand the relative value of the stock is unchanged compared with its split-adjusted earnings.” Once more, cheap does not necessarily guarantee profitability.
As always on Wall Street, the trend is your friend. Looking ahead, Sony (SNE) is poised for a 5-to-1 stock split on Oct. 1. And there are still some big names that haven’t announced splits yet but are rumored to be contemplating them later this year. Meta Platforms (META), semiconductor stock ASML Holding NV (ASML), and digital workflow stock ServiceNow (NOW) are three candidates to watch. So while the first impulse is to cheer about some of these stocks becoming more ‘affordable,’ remember that these splits are mostly cosmetic and an astute PR move.