Stock Splits
Where the Gold is Found
There has been a long standing debate on whether or not stock splits create profits. I think most people believe that there is value in buying stocks that split but the uncertainty comes from not knowing when to purchase stock splits and when to sell. There are many “stock experts” who will tell you that there is no real added value to stock splits. They give their harangue on how a stock split gives the investor extra shares of stocks (i.e.: if a stock split is 2 for 1, after the split an investor will double the number of shares he/she owns) but that the worth of each stock is only half as much so that the investor’s value is the same. Therefore, they try to make a case that there is no real profit to be made through buying shares of stock in a company simply because their stock is splitting. While this is true at the exact moment of the split, what happens before and after the split can be quite extraordinary.
There are several studies that show companies whose stock splits do indeed create profits. There are the short term profit studies and the long term profit studies. SplitMaster.com, a company that specializes in the study of stock splits, has performed extensive analyses on stock splits in the short term. While they do not give the exact results of their studies, due to the fact that this is proprietary information they sell to their subscribers, they do state that there are substantial profits to be made on stock splits within three to four weeks of the actual split date. The company states, that while not all stocks that split are profitable during this time, the astute investor can literally make a fortune on stock splits if he/she follows a strategy based on history. SplitMaster.com claims that the picks it has made, based on its own studies, would have earned the investor 182.16% return in the year 1999. The company published, in advance, these picks on their web site and they post conclusive proof of this claim.
In another research performed by the Ford Investor services, Inc., the report analyzes the performance of stock splits held for six months. It further analyzes this performance for a period of 20 years, from 1976 through 1995. During this period, it compares the return on their stock split portfolio to that of another successful portfolio called the Ford Universe portfolio. In every year, bar non, the stock split portfolio substantially outperformed the Ford Universe portfolio.
A stock split report called the “Anatomy of a Stock Split” discusses the reasons a stock that splits produces higher returns. While I will not discuss all the reasons in the report, I will give one very important reason it states. The very reason a company decides to split their stock is that the company is doing exceptionally well and the stock price is rising to a high level that makes it hard for the average person to invest. This in itself means, in most cases, an investor is investing in a company that has good value.
We would like to close by stating, that if there are any reports that show stocks splits on the whole do not outperform the general market, someone please show me.