By Jack Hough
Some smart Wall Street people recently circulated a trading strategy so dumb sounding that it might be perfect for the moment. I'm not recommending it, but I won't be surprised if it works. Details and stocks in a moment.
Picture a conversation like some I've overheard between investing novices. One says they should buy stock in such-and-such company because it's trading at $750, so it must be doing well, not like that other scraggly stock over there at $30. No, the other says, you've got it all wrong. You should buy low and sell high -- go for the $30 stock and unload it when it hits $750.
You can kind of see where both are coming from. If we were talking about sport coats or smartphones, the higher price might signal better quality. Also, maybe the $750 stock is a big recent gainer that really is doing well. But maybe not. Regeneron Pharmaceuticals, at a recent $682, was down 28% over the past year, while Adobe, at $446, was down 30%.
Anyhow, experienced investors know that share prices are arbitrary things. Companies can make them up when they go public and then adjust them every so often through stock splits or, if things go sour, reverse splits. What really matters are factors like the overall value of the business, the debt and cash flows, and the prospects for things to get better or worse.
As for "Buy low, sell high," I think of it as an un-truism. Truisms are correct but unhelpful -- it is what it is. With stocks, most trades every day represent two parties disagreeing about whether an issue is low or high. It's difficult to tell. Moreover, stocks tend to rise over time. Index investors have made out beautifully over the decades by buying high and holding out for higher. A less pithy but more useful mantra might go something like: Buy often, and ideally, hold until it's someone else's problem, because you're either dead or rich enough to give it away.
But forget all that. At the moment, the first person might be right -- the one who wants to buy the $750 stock. This is judging by three recent observations by the research investment committee at BofA Securities.
No. 1: More stocks than usual are splitting. There were 17 split announcements last year in the S&P 500, including Nvidia, Broadcom, Walmart, and Chipotle Mexican Grill. That's the most since 2013. If that doesn't sound like a lot, it's because using a longer lens, it isn't. It's a large portion of the 44 splits we've seen over the past five years, but nothing compared with the 364 splits over the five years that ended when the dot-com stock bubble popped in 2000. There's reason to suspect that splits will become more popular from here, however, because...
No. 2: Stock splits are leading to big returns. Since 1980, stocks have returned an average of 25% over the year following split announcements, versus 12% for the S&P 500. Last year's class of splitters has done even better, returning 17% in six months. Also...
No. 3: There are a lot of split candidates. Among S&P 500 companies, 40 trade over $500 a share.
I can think of a few reasons stock splits dried up. Decades ago, trading odd lots, or fewer than 100 shares, could be cumbersome and costly, and buying fractional shares was unheard of. Today, online brokers offer stock trading in dollar amounts, not just share counts. Nominal prices have become less important than ever. Even BofA notes that splits don't affect fundamentals. Warren Buffett avoids splitting Berkshire Hathaway A shares, recently more than $709,000 apiece, on the belief that the high price attracts only long-term investors. Chipotle said it split its stock 50-for-1 last year in part because it was becoming difficult to award employees with precise amounts of stock.
My hunch is that not splitting shares became Big Tech--fashionable over the years, like alpine vests. But now splits are bringing big gains, and those are fashionable, too, even if the whole thing doesn't make sense. So, there could be a split-valanche soon, raising the question of who's next.
Before I get to how to tell that, more disclaimers: Buying stocks strictly for split potential is gimmicky. Don't do it. Or at least, use caution. May cause rashes, heart palpitations, and irritable bowels. Better to research company fundamentals.
Oh, who am I kidding? Prudent is out of favor. Think of all those sensible-seeming rotations over the past decade-plus that didn't pan out. Value stocks? Nope. Small-caps? Not really. Overseas stocks? Definitely not. You know what's going great? Gigachad. It's a memecoin representing, to quote from gigachad.com, "tokenised masculinity." A sparse splash page there explains that there is "no intrinsic value or expectation of financial return. There is no formal team or roadmap." It's up 91,000% over the past year, with a market value of more than $600 million. I'm leaving out some key fundamentals. There's also a picture of a guy with a beard on the website, and phrases like, "I don't care, I win."
So chase splits if you want. I'll just note that the list of contenders reads a lot like the highfliers that investors are chasing anyway. The biggest commonality among past splitters is that they had big price run-ups before the announcements. Starting with $500-plus stocks, and sorting for ones that have done even better over the past one, three, or five years than the average company that decided to split, BofA highlights a handful of names. Netflix stands out, along with Fair Isaac, Eli Lilly, Meta Platforms, and Goldman Sachs.
Write to jack.hough@barrons.com
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January 31, 2025 03:30 ET (08:30 GMT)
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