We’ve talked about how some great stocks are on sale right now.
Here’s one for you: What if a stock went from $2,260 per share to $113… in one day… and nothing about this dominant business changed?
You will see that Monday morning with shares of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
But don’t get too excited. In this case, $113 = $2,260.
That’s impossible, of course. So what’s going on?
GOOG shares are splitting 20:1. After Friday’s close, every single GOOG share gets divided into 20 shares. There will now be 20X more shares on the market, but the price per share be 1/20th of what it used to be.
This is not some once-in-a-lifetime bargain to jump on.
However, interesting things can and do happen around stock splits. So in today’s Market360, let’s look at whether this particular split is a buying opportunity.
Why Would GOOG Split?
This is the second time in six weeks that a $2,000 stock has split 20-to-1.
Amazon (NASDAQ:AMZN) closed at $2,447 on Friday, June 3. On Monday, June 6, it opened $125.25 after the split. Perhaps not coincidentally, the stock hit its highest price that day since the end of April. As of this writing, it is down about 10% since then.
If it feels like you’ve been hearing a lot about stock splits, that’s not because the number of splits has gone up. It’s because big and well-known stocks are doing the splitting.
In the last two years, Amazon, Apple (NASDAQ:AAPL), NVIDIA (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA) have all split. Tesla has another one in the works — a proposed 3-for-1 split shareholders will vote on at the company’s annual meeting Aug. 4. And one of the crazy meme stocks, GameStop (NYSE:GME), will split 4-for-1 next Friday, July 22.
The main reason companies split is to make their shares cheaper. In Alphabet’s case, the 20-to-1 split is an instant 95% price cut. That makes the stock more affordable, especially to individual investors.
Honestly, now that investors can buy fractional shares, splitting changes things less than it used to. Still, the companies want to make their stock as accessible as possible to retail investors, and a lower price is the best way to do that.
Is the Split an Opportunity?
Stock splits do tend to attract investors. I closely monitor buying pressure in stocks as it is a sizable chunk of my quantitative analysis, so I do follow splits closely.
Stocks also usually get at least a minor bump. Over the last five years, stocks that split are up one year later 61% of the time, according to the folks at Bespoke. But the bottom line is less encouraging. Stocks that split outperformed the market less than half the time.
A split by itself is not an automatic buy signal. It is a minor factor when compared to a company’s fundamentals.
I have followed Alphabet for a long time. I still think of it as Google, even though it has been almost seven years since the name changed. As you may have seen, MarketWatch has called me “the advisor who recommended Google before anyone else.”
I still like it all of these years later. It is one of the biggest business success stories of our time.
But that doesn’t mean I view the stock as a buy all of the time. In fact, right now I would consider it more of a hold.
While I think the split could bring in new investors — in fact, I think it could pop 8% on Monday — the biggest problem right now is earnings momentum. Earnings are expected to shrink nearly 3% in the current quarter and about 1% for the fiscal year. Alphabet fell short of expectations last quarter by 3.6%, which isn’t a huge miss, but any miss for the company has been rare in recent years.
So, should you run out and snap up shares of GOOG after the split?
Well, according to my Portfolio Grader, the answer is no — though that doesn’t mean it’s a sell either.
As you can see in the Report Card above, GOOG has been a “Hold” in my Portfolio Grader for about three months now. It holds a C-rating for its Fundamental Grade, which is not bad but reflective of the current earnings situation. Its Quantitative Rating is a bit higher at B, and that may hold up after the split if buying pressure builds.
My recommendation is to hang on to GOOG if you own it, but I would be hesitant to buy it now if you don’t. Alphabet is a great company in the midst of an earnings lull, not unlike a lot of other companies. When that tide starts to run, I would expect it to again be a buy at its post-split share price.
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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Amazon.com (AMZN), Alphabet Inc. (GOOG), NVIDIA Corporation (NVDA)