This Reverse Split Will Burn You

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If I told you about a company whose stock price is about to grow tenfold in a few weeks, would you listen?

If I told you to stay away, would you keep listening?

See, shares of online retailer Bluefly (Nasdaq: BFLY) really will be trading 10 times higher come the morning of April 4, 2008. The rub is that each of your shares will be immediately converted into a tenth of an outstanding share.

Yes, Bluefly is another penny stock throwing its hat into the reverse split ring. In a smoke-and-mirrors way to maintain its Nasdaq listing, the 1-for-10 reverse stock split will transform a company with 134.3 million shares at $0.46 today into a company with 13.43 million shares at $4.60, or 10 times wherever the shares are at by the market close on April 3, 2008.

Nothing changes. Bluefly will remain the same profitless Internet apparel retailer, one that can't even muster positive earnings during the seasonally spiked holiday quarter.

The ups and downs of going backward
Reverse stock splits aren't pretty. They are admissions of failure. They are public declarations that certain companies can't dig their way out of the pocket change muck on their own.

History isn't kind to the companies, even when they're giants like Sun Microsystems (Nasdaq: JAVA). After spending more than five years of waffling about in the single digits, Sun executed a 1-for-4 reverse split this past November. The instant makeover turned four shares of Sun's stock at $5.14 into a single share at $20.56. Did it win over new fans at a higher price point? Not necessarily. Sun's shares have shed more than 20% of their value, and Sun is a company that has actually excelled at turning its financials around.  

Sun is no chump-change chump. We're talking about a $15 billion company here. Still, if Sun hasn't held up well, what hope is there for the more obscure reversers -- like Bluefly -- to come out as winning investments on the other side of this split makeover?

The sad truth is that most reverse stock splits are executed by penny-stock garbage that you've thankfully never heard of. However, Sun isn't alone when it comes to household names biting the bullet. In the fall of 2006, JDS Uniphase (Nasdaq: JDSU) completed a 1-for-8 reverse split. That didn't help either. Its shares are off by more than 25% since the maneuver.

Some splits aren't bananas
They're not all duds. Priceline.com (Nasdaq: PCLN) eventually took off after its 1-for-6 reverse split five years ago. Brightpoint (Nasdaq: CELL) staged a humbling 1-for-7 reverse split six years ago. Things worked out so well for the company that it has issued five of the more conventional forward stock splits to bring its share price lower since then.

The key is to boost a split with catalysts to keep the stocks inching higher after the reverse. Sun probably has that going for it. The timing just proved to be awful, as the overall market was peaking.

Sirius (Nasdaq: SIRI) is a prime candidate for a reverse, especially if its pending merger is approved. As a TiVo (Nasdaq: TIVO) shareholder, I'm glad to see the company get back on track financially, but it may need a small reverse -- like Sun -- to get its shares back consistently into the double digits.

Where does that leave us? Yes, Bluefly. I don't smell the catalysts to propel the stock higher. Like many reverse split candidates, it's simply doing it to appease Nasdaq listing requirements.

I've seen how that ends. It's rarely pretty.

Reverse the clock to revisit these related stories:

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• 8 Hot Stocks Under $8
• Priceline Goes in Reverse