Stock Splits: A Golden Opportunity or Fool’s Gold?

Last updated: June 25, 2024

A person looking at stock trendsStock splits have become the talk of the town, with giants like Nvidia and Chipotle making headlines. But the million-dollar question remains: Should you dive in?

A Tale of Two Opinions

Ask around, and you’ll hear mixed reviews. Some analysts swear by stock splits, noting they often outperform the S&P 500 in the year following the announcement. Others caution that a split isn’t a surefire ticket to riches.

Splits Unpacked

Stock splits come in two flavors: forward and reverse. Forward splits, the popular kind, reduce share prices while increasing the number of shares. For instance, a 2-for-1 split means your shares double, but each is worth half as much. This year, Nvidia, Broadcom, Walmart, and Chipotle have all joined the forward split bandwagon.

Reverse splits, on the other hand, hike up share prices by reducing the number of shares. Think of it as consolidating your assets into fewer but more valuable pieces.

What the Numbers Say

Historically, splits have been bullish. Bank of America’s Jared Woodard points out that stocks typically see a 25% bump in the year following a split announcement, often doubling the market’s performance.

Yet, some experts argue the hype is short-lived. LPL Financial’s George Smith notes that stocks might only outperform the market briefly after the announcement, with no consistent long-term gains.

Why Split at All?

The logic behind stock splits is simple: make shares – more affordable. A share of Chipotle at $64 post-split is a lot more enticing than its pre-split price of $3,200. More affordable shares mean higher trading volumes, boosting liquidity and making stocks easier for businesses to buy and sell.

To Buy or Not to Buy?

In the short term, stock splits often give a nice bump. But, attributing this to the split or concurrent earnings announcements can be tricky. Longer-term, many factors come into play. While Woodard’s data shows split stocks usually outperform the market, he warns that outperformance isn’t guaranteed.

Economic challenges can also temper gains. High-profile companies like Amazon and Tesla struggled post-split during times of economic uncertainty. Yet, recovery stories like Amazon’s post-split performance, up 26% in 24 months, offer a glimmer of hope.

Who’s Next?

With over 30 stocks in the S&P 500 priced above $500, the field is ripe for more splits. Analysts are eyeing Facebook parent Meta, which has never split its stock despite its impressive price surge since its 2012 IPO.

As the world of stock splits evolves, investors must weigh the risks and rewards carefully. While history favors those who embrace the split, caution remains the name of the game.

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About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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