High-profile stock splits get everyone’s attention…
Recently, the biggest one was Amazon (AMZN) announcing their 20-to-1 split on March 9.
Initial reactions were very positive.
AMZN rose as much as 10% after the closing bell that day.
Not to be outdone, Tesla (TSLA) also announced a split on Monday, fueling an 8% jump.
Then came the headlines… “Tesla, Amazon Stock Splits Trigger Retail Stampede” from Bloomberg on March 29.
Bloomberg cited how Tesla was the most purchased stock among Fidelity customers.
Soon, I was flooded with texts from friends asking if they should buy into the commotion… The answer was not what they wanted to hear…
That’s because I blandly answered, “If you believe the market is going up, then buy AMZN. And if you don’t, then don’t.”
But I soon realized where the frustration was coming from…
Most people like to gravitate towards one event or reference point to help them decide whether to buy or sell.
After all, just like computer code, our brains are wired in a binary way.
And that’s when the brain starts messing with you… until you’re fully hooked on an idea and go for it.
So, I began counting down the days until AMZN would retrace all the gains from this announcement and retest its pre-split prices.
It took just three days.
You see, stock splits are non-economic events.
Meaning, there’s no change in anyone’s percent ownership nor does it help the company’s prospects for higher earnings.
It mostly causes a flurry of price action.
But to put the effect of stock splits to the test, I examined 1,693 U.S. stocks that announced stock splits since 1981 to see what (if any) effect stock splits have on prices.
The sample includes famous stock splits – like Tesla’s previous split announcement on August 11, 2020 – and ones that no one has heard of.
Here’s what I found…
The table above shows that typically stocks do go up.
After an announcement, stocks will rally about 1.6% on average during the following week and 10% the following year.
But so does the market at large, so this performance doesn’t tell us much.
It’s like the saying goes, “A rising tide lifts all boats.”
The effect of the overall market needs to be backed out. On top of that, the performance of the stock needs to at least be higher than the market to show any kind of strength stock splits offer.
Otherwise, there’s nothing there. You might as well just invest in the S&P 500 and be done with it.
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So, when these stocks go through a market filter, something else becomes clear…
Investing in stock splits is nothing more than a leveraged bet on the market.
Take a look at this chart… It takes the above sample and filters it according to when the market rises or falls after the announcement date…
You can see when the market rises these stocks do better than the overall market. But when things go south… these stocks underperform in a big way.
Simply put, to those investors interested in chasing stock splits, I’ll repeat what I told my friends… it all boils down to the direction of the market.
Based on all this data, stock splits are nothing more than a factor contributing to the Hype Lifecycle.
And most importantly, if there’s no economic reason to invest – don’t.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, Delta Report member Keith thanks Jeff on his recent update in his blog…
Last night’s “Late Night Update” is exactly what I wrote about recently. This evening perspective is very helpful with both overnight trading and positioning for the next day. Thank you! It’s very much appreciated. Keep it up, please.
– Keith W.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].