Why would someone pay me for that type of information? Well, the NASDAQ was in a bubble like we’d never seen. And Companies took advantage of that bubble by splitting their stock, thus making it cheaper for more masses to enter, and the stock would zoom back up. But traders often saw that the minute a split was announced, it would start climbing higher. They wanted in quickly and cell phones weren’t that popular yet. Hence the pager.
This week, NVDA did a 4 for 1 stock split. Oh the memories!
Back “in the day” as folks like to say, during the madness that was the NASDAQ during the late 90’s, stock splits were akin to “gold.” So much so, that we actually sold “split pagers” to subscribers.
Really? Indeed. The second a stock split crossed the Dow Jones wires, we’d instantly send it to hundreds and hundreds of pagers. It would have the symbol, the type of split (like 2 for 1 or 5 for 2) and the date of the split.
Why would someone pay me for that type of information? Well, the NASDAQ was in a bubble like we’d never seen. And Companies took advantage of that bubble by splitting their stock, thus making it cheaper for more masses to enter, and the stock would zoom back up. But traders often saw that the minute a split was announced, it would start climbing higher. They wanted in quickly and cell phones weren’t that popular yet. Hence the pager.
So what’s up with stock splits? Why do they often move the price of a stock? The media will tell you that “the value doesn’t change, nothing changes” which just simply isn’t true. Yes the “value” at the time of the split stays the same, no question. If you have 100 shares of XYZ at 100 dollars per share and they do a 2 for 1 split, you now have 200 shares, but at 50 bucks. Two nickels for a dime sort of thing.
Ahh, but there’s much more that goes into the equations. Some of it mechanical, some psychological. For instance, One reason stocks that announce a split, is that the split draws investors’ attention to a company’s progress, resulting in increased buying. Companies often release information and raise their dividends at the time of a split, which is conducive to stock-price appreciation.
Then of course there’s the ability for more people to be invested in the stock. The reduced price per share after the split attracts small investors, many of whom, like large investors, prefer to buy round lot (100 shares) of stock. Remember however, there was a reason that XYZ got to 100 bucks in the first place, and that reason was because people wanted it and were buying it. Even at 100 dollars, they saw it as valuable.
Now that it's 50 bucks, it becomes "perceived" as being on sale. A bargain. Here’s where the semantics come in. Nothing has changed as far as the company goes. Not more sales, not more revenue, not more profits. You have the exact same P/E at the 2 for 1 adjusted 50 bucks as you did when it was 100. So technically nothing has changed.
But in the mind of the investing public, a lot has changed. A stock that they wanted to load up on, but couldn’t because of the price,has now become more affordable. That drives buying. Everyone likes buying things on sale, and in the public’s eyes, a stock that was 100 and is now 50, is on sale.
A research report in the Financial Review (volume 18, No. 4) of the Eastern Finance Association gives further information. William Nichols and Bill McDonald, the authors of the study, looked at almost 500 stock-split announcements between 1960 and 1976. Most of the splits were two-for-one, but they varied from as little as five-for-four to as much as nine-for-one. The article stated, “typically, these stocks rose sharply relative to the market in the months preceding and including the split announcement, and then fluctuated randomly relative to the market in succeeding months.” Nichols and McDonald discovered that “when one-half of the companies in their sample with the highest earnings split their stock, the stocks continued to rise faster than the market in the months following the split announcement. - Julian Salas
During the NASDAQ tech frenzy, a split announcement was almost universally the ticket to a soaring price. Remember DELL? They had a habit of splitting multiple times and running right back up to their pre split price in a matter of months. Well, people recognized this, so the second DELL announced a split, people would pour in, sending the stock higher, then hold through the split and 10 months later have twice the amount of shares they had, AND the pre split price!
Hence, history showed us that in about 80% of the time, a stock that does a 2 for 1, often attains its pre split price in 18 to 24 months. Well, the math gets a little more fuzzy on 4 for 1 splits. Doing a 4 for 1 usually means your stock is incredibly expensive, and to get it affordable you're chopping that price down by a ton. However, it is often still more expensive than the average guy can afford. So lets take NVDA for example. Even after a 4 way split, they're still 183 bucks a share. Not every mom and pop can buy 500 shares at that price. Some couldn't buy 50.
So the recovery in 4 for 1 splits is usually much longer than in 2 for 1’s. Considering that 2 for 1’s are the most common form of split, and 3 for 1’s less common and 4 for 1’s even less, the “rules” concerning how they all react after the actual split are a bit different. But in round general terms, once the split is announced, the stock gains quickly. Then just ahead of the split, it often fizzles a bit.
After the split, it’s not uncommon for it to trade lower by a bit, and then just go into a sideways pattern of small ups and downs. But ultimately, if the underlying reasons the stock was so expensive are still in play, it will eventually start grinding its way back up to its pre split price.
Is NVDA worth taking a shot at? I am not a broker, nor an investment advisor. I can’t tell anyone what to do. I can just offer my opinion, and it’s my opinion that NVDA is a tremendous company, it’s still growing, and that yes, some long dated call options probably make a lot of sense, once the post split chop settles down.
NOTE however… As I mentioned in a past letter, News trumps everything. If news hits that the Feds are going to taper or remove accommodation, stocks will plunge, including NVDA. So we always have to remember there’s risk, even in a post split company as good as NVDA. Good luck!