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Post of the Day
February 3, 1999

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Subject: Splits and Earnings Expectations
Author: MagicMike

I've been away for a little while, and in reading previous posts I can see that that most of the debate has been about rat recently. I tend to think its stimulating when we all disagree at times, as long as the debate centers around information and doesn't get too personal. Stock splits inevitably are a matter of investor taste, and unto themselves don't make the stock any more valuable. However, I feel that anti-split proponents dismiss too quickly what splits mean as an indicator. Their frequency can be viewed as an indicator of rapid growth in a company's revenues. I remember a couple of years back when Dell split its stock twice in a year. This happened in the midst of exceptional growth. Yes, yes, they could have left it alone, but how many new investors are willing to pay $500 to own one share of Dell.

"Common stock should be affordable to allow common people to partake. The stock market is a foundation for the American Dream..."

The same thing is happening with AOL. The stock just split in November and they've already announced another 2 for 1 split (and will likely split again by the end of the year). Again, the splits are often indicative of a particular growth phase. That is most certainly true of the big tech names, who seem almost at times to be in a race with each other to split their stock. Intel, AOL, IBM, and Microsoft have all recently announced splits, and I expect Cisco and Lucent not to be far behind. Microsoft has split its stock on eight previous occasions. Do you know what would have happened if Microsoft had never split its stock and continued to have the same rate of growth in share price? I'll tell you what would have happened ... average people would never be able to buy shares of Microsoft. $80,000 for one share? No thank you.

Common stock should be affordable to allow common people to partake. The stock market is a foundation for the American Dream, and I hope that average people will always be able to afford to buy in. Splits help give them an affordable point of entry.

"Splits increase outstanding shares and make it more difficult in the longrun for a few players to cause wild swings in the share price."

I also disagree that splits add to volatility over the longrun. Do you know why some of the small internet companies shoot up so rapidly and fall just as quickly? They have so few outstanding shares that it magnifies their volatility. Splits increase outstanding shares and make it more difficult in the longrun for a few players to cause wild swings in the share price. This is why stocks like Compaq can have millions of shares traded in a day and move only within a narrow trading range (which is insulating in a general market selloff). The stock is in part shielded from downward pressure by the number of shares it has floating. Companies with much fewer outstanding shares have much more vulnerability in general market selloffs. The debate over splits will continue (it's a healthy debate), and as far as Cisco goes, you can be sure that the company will continue to split its stock (they seem to like the 3 for 2 split best), especially if undeclared rival Lucent continues to split as well.

Now, a more immediately relevant issue: earnings. Cisco announces earnings on Tuesday, does anyone know what the whisper number is that's being talked about on the Street?


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