ZINGER KEY POINTS
- Two companies timed their stock splits perfectly and afforded investors extraordinary gains from the non-financial event.
- Tesla was the biggest beneficiary of financial engineering.
The price action in issues that have upcoming stock splits can vary. There is no one particular way to invest in them, but there are certain trends and tendencies that can be used in the analysis of an issue that is approaching a stock split.
With Alphabet Inc splitting 20-for-1 on Monday, it is the PreMarket PrepStock of the Day.
Traditional Pattern: On many occasions, when a major issue announces a stock split, there is a temporary surge in price that does not always hold in the long run. Instead, once the initial euphoria wears off, the issue may retreat to the area it was at or go lower and consolidate.
On many occasions, the issue will rally into the record date — when shareholders must own shares to participate in the split — and even a few days after. Once the actual split takes place, some of the pre-split run-up gains will erode.
Timing Of The Split: Two companies timed their stock splits perfectly and afforded investors extraordinary gains from the non-financial event.
For those two companies, Apple Inc and Tesla Inc., there were aggressive buyers from the initial announcement, through the record date and a day or two following the split.
Tesla was the biggest beneficiary of financial engineering. When Tesla announced its stock split in August 2020, its shares rose more than 60% in the two-and-a-half weeks between the announcement and the actual split
Of course, that was back in August 2020, when the markets were in blastoff mode following the COVID-19 low in March.
Different Environment, Different Reactions: The timing of the Amazon.com Inc. 20-for-1 stock split could not have been worse. Just as the bear market of 2022 was taking a breather, Amazon announced its split on March 6.
The issue did have a nice burst off the initial announcement, but came crashing down with the remainder of the market. The rally from the $140 area to the March 29 high ($170.83) unraveled and a whole lot more.
In fact, the only way to benefit from its split was to buy shares four days ahead of its record date (May 27), when the issue bottomed at $101.26 and ended that session at $104.10. On the actual record date, the issue closed at $115.21. The issue continued to rally and made its high for the move on the actual split date on June 6 at $128.99.
Within five days, it came all the way back down to test the low for the move.
Who Cares? Similar to Amazon, it has been very difficult to extract any alpha from investing in the split of Alphabet shares. Of course, the market environment has played a role.
In its Feb. 1 earnings release the company announced it was doing a 20-for-1 stock split.
On Friday, shareholders will receive 19 additional shares for every one they own on the record date of July 1.
On Feb. 2, the issue surged from $2,757.57 to $2,960.73 for a $203.16 or 7.4% gain. The retreat from that peak did come until the day following the record date at $2,124.99.
Interestingly, Alphabet did have a nice rebound off the low that was capped at $2,408.70 on July 8. Since that peak, it has retreated to the $2,220 area. Alphabet will begin trading on a split-adjusted basis on Monday, July 15.
Buyer Beware: Although stocks may see a temporary increase in price after the announcement of a stock split, it is likely the Tesla split will never be replicated. The most important reason for this: a stock split does not change any of the fundamentals of a company, only its price. What matters most is what is going to happen to a company's balance sheet moving forward.
