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A Rebirth is upon us?
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: July 2nd, 2007 at 9:31 am EST
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A renaissance is a revival of a classical period in literature, art and music. History tends to repeat itself, or just copies it. We see the same thing happen in markets…different timeframes, of course. But there are parallels to draw from certain time segments…booms and busts are often repeated in similar fashion. Speculation is seen over and over with the same results. Different manias run the markets up and down, too. One that may come alive again is the ’stock split’ phenomenon. Not seen since the late 1990’s, we could see a big sea change to more stock splits in the near future….all thanks to Research in Motion.
Let’s be very clear: Stock splits explicitly do NOT add value. They divide a stock price up into smaller pieces to make for a cheaper purchase. You cut a pie into 8 slices, but you still have one pie. Three shares at 50 bucks is the same as one share at 150. But for some reason, smaller investors like the leverage of more shares and are willing to enter a stock with a smaller price. It’s really gaming the stock price by the firm, but creating more demand for shares…not value.
Roll back to the late 1990’s. I recall the fever created by tech companies and such when they announced stock splits. You name it, they did it: JNPR, YHOO, RBAK, CSCO, MSFT, INTC, QCOM…just to name a few. It was the ‘thing to do’, the ultimate in highflying stocks…that’s what small traders wanted. I remember once when JDSU announced a stock split in late Nov 1999. The price was around 225 per share, so 2-1 stock split, Jan 3, 2000. The crowd got so giddy over this they bid the stock up to nearly 400 a share by the time the stock split occurred. That day, they announced ANOTHER 2-1 stock split! Truly amazing, but a sign that the mania was closer to the end than the beginning. Sure enough, after the bear market wiped out alot of value, companies had no reason to split their stock…the market did it for them! The last five years have a been a low point for stock splits, but that could change.
Fast forward to today. Last evening, Research in Motion announced tremendous earnings, upped guidance and a 3-1 stock split. The stock is up 20% today on the news. The giddiness of a stock split? Perhaps…the stock has been over $100 for nine months and this will make for a ‘cheaper’ price. So, is one big reaction the start of a trend? Hardly so, but let’s watch for another one, then another….then we may see the mania just start again. Even though there are some companies (aapl, goog) that have said NO to a stock split, you can be sure they are watching the action in RIMM very closely. After all, if it creates demand by bringing more buyers on board, then it’s a no-brainer decision. How long could this mania go on? It all depends on how many names decide to split. There are several out there, including GOOG, AAPL, IBM, CME, ICE, TNH, RTP, NYX (low float), DE, BIDU, X, ATI…and many others. I’m not advocating a buy on any of these for this sole reason, unless something looks compelling. Just be aware that this next frenzy has been seen before and may see some trade opportunity: but is bound to end the same way.
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Bob Lang, Stock Market
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