Bring Back Stock Splits..
Based on recent reactions, why wouldn't you?
You may not have seen this news story during the week given all the other headlines, but I sure did. The stock eXp World Holdings - $EXPI - announced a 2-for-1 stock split.
Why is this news? Splitting a stock shouldn’t have any effect on share value. Based on the Tuesday close of $EXPI at roughly $80, a 2-for-1 split would mean that someone owning 100 shares would now own 200 at a split adjusted price of $40 on the record date. The value remains the same. You’d still have about $8000 worth of stock in the company.
It’s pretty simple and basic math, but don’t let that information out to the frenzied public. Apparently now the news of a stock split means buyers come rushing for shares like it’s a hot IPO. Let’s take a look at $EXPI..
*Full disclosure… I was long 100 shares of $EXPI. I bought it based on it’s technicals and thought it could run to its old high and may even breakout higher. The plan was to own shares for a few days and the goal was to sell half as it neared its highs and re-evaluate. My thoughts were confirmed by my “financial advisor” at Ramp Capital as seen by this tweet taken from our direct messages.
OK. Enough of the humblebrag and back to the story.
As a result of the pre-market news of the pending stock split, shares gapped higher from a close of $79.77 to open at $84.56. A 6% jump! The genius that I am sold half of my shares thinking this was a major overreaction.
Boy, was I dumb.
Shares of $EXPI ran as high as $97.50 as volume surged to a 3 month high. I was out of my last 50 shares at $90. Clearly, I gave it away. (Which is ironic since I just wrote about that topic a few weeks ago.) The stock closed up 15.87% on the news, but it didn’t stop there. Shares continued to surge the rest of the week and finished at all-time highs. $EXPI was now up $23.21 and closed the week at $102.92. A three day gain of 29.1%. All solely based on the news they were splitting their shares 2-for-1.
Where Have We Seen This Before?
I know this audience knows the answer to this question. The same exact reaction occurred this summer when both Tesla and Apple announced they were splitting their shares. It made zero sense at the time and still makes little sense to me now, but based on $EXPI, I think we could be seeing a trend.
Apple announced a 4-for-1 stock split during their quarterly earnings report and shares jumped 7%. They climbed higher through all of August and gained a total of 36% from the time of the announcement until the day of its split.
Tesla announced a 5-for-1 split on August 11th. Like Apple, it saw a jump of about 7% on the first trade after the announcement. The stock then finished higher over 10 of the next 13 days leading up to its split. The rally accounted for a ridiculous 63% gain.
Granted the timing of their climbs also coincided with an enormous large cap rally in the market. Nonetheless, the reaction and the buzz that the splits created led to both stocks far outperforming their peers.
When I started my career at the NYSE in the 90’s, stock splits were a rite of passage. Blue chips stocks would rally from double digits to triple digits and BOOM - stock split. I vividly recall traders boasting when a stock they owned split 2-for-1 or maybe even 3-for-1. This was winning. In their minds they were crushing it.
That trend and sentiment quickly reversed course as we hit the Great Financial Crisis from 2007-2009. Stocks didn’t trade at lofty prices that warranted splits. When we came out of the crisis having a high stock price became a badge of honor. I’m not sure why this sentiment changed, but having a high priced stock seemed to make you part of an elite class.
According to Forbes, US markets between 1980 and 2010 averaged 161 stock splits per year. After the GFC, between 2011 and 2017 there were only 67 in S&P 500 stocks.
Chart - George Calhoun, Forbes 9/21/20
Some notable names like McDonalds, Walmart and Amazon have stocks trading at price levels above and beyond where they split stocks in the past. Yet for some reason they choose not to do so in today’s environment. Who truly knows their thought process, but it doesn’t seem to be what the individual investor wants to hear.
The question now - will listed companies change their thought process when it comes to splits seeing that the individual investor responds so favorably to them? Granted the sample size is small, but given the craziness we’ve seen in this market over the past few months it may be worth a shot.
The psychology of it reminds me of when my mother proudly boasted after Apple’s 7-for-1 stock split in 2014. She went from having 20 shares to 140. Forget the fact that her son, who got her into the stock, was a genius. That was secondary. She had more stock. She was winning!
So split your stocks. Take your math and cram it. No one wants to hear logic. People don’t care their account value is the same. It doesn’t matter. The psychology behind these moves shows that people just want more and will pay up to get it.