Bring on the Reverse Stock Splits

Is the next play in Mr. Market's playbook a reverse?

A wave of reverse stock splits appears almost inevitable, as battered stocks try to maintain their stock listing and win over investors who shy away from speculative stocks that trade in pocket change.

Six Flags (NYSE: SIX  ) may be leading the way. The regional amusement park operator announced that it is not in compliance with New York Stock Exchange listing standards, requiring stocks to not fall below the $1.00 share price for 30 days.

If the company is unable to lift its shares organically, a reverse split is one of the alternatives that the company is considering.

It's not the only company on the exchange's watch list. The NYSE sent a similar notice to Citadel Broadcasting (NYSE: CDL  ) last month, as the country's third largest terrestrial radio operator "broke the buck" in August.

Reverse splits aren't all that different than the more conventional stock splits. When a company declares a 2-for-1 stock split, investors see their share counts double as a stock price gets cut in half. Reverse splits work the other way around. A 1-for-10 reverse split, for example would find a company with 10 million shares at $1 apiece become the same $10 million company, only with a million shares at $10 apiece.

Reverse splits are becoming more common these days. Sun Microsystems (Nasdaq: JAVA  ) executed a 1-for-4 reverse split last year. Online fashion retailer Bluefly (Nasdaq: BFLY  ) went through a 1-for-10 reverse this year.

It's humbling. It's embarassing. It's also sometimes necessary. Beyond exchange listing standards, consumer-facing companies can't afford to be associated with dirt cheap prices.

Will a thrill-seeking teen, unsure about whether or not to renew his Six Flags season pass, pull up a stock price and decide against it because the stock closed at $0.65 a share yesterday? No, but a pocket-change share price can hurt in other ways, as traditional media lays off on the fiscal accolades, and potential entertainment-industry executives resist the urge to partner with Six Flags.

I suggested that satellite radio giant Sirius XM Radio (Nasdaq: SIRI  ) declare a reverse stock split this week. Sirius needs to attract executives, on-air talent, and subscribers. It's hard for any of those factions to tether themselves to long-term commitments if they believe the company is failing.

A reverse split is a zero-sum game, but it can still fool plenty of people who pull up a stock quote. It also can attract institutional investors who wouldn't dabble in lower-priced equities.

Companies like Citadel and Six Flags may be the next batch of reverse stock split candidates, but they're really just about to open up the floodgates.

More news than static on Sirius XM:

XM Satellite Radio is a former Rule Breakers stock pick. A free 30-day subscription will shed some light on why the satellite radio company made the cut before being cut.

Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius and has a 2008 Six Flags season pass. He does not own shares in any of the companies in this story, save for Six Flags. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 03, 2008, at 4:48 PM, justmejudy wrote:

    I owned 400 shares of Java stock worth about $5.00 a share before the reverse split. Right after the reverse split my 400 shares went to 100 shares for about $20.00 per share. Soon after Java began to tumble almost back down to $5.00 a share once again and instead of having 400 shares the reverse split gave me 100! If any company wants to do a reverse split vote NO! It won't help, only hurts the stockholders. Java stock is $6.75 a share today.

  • Report this Comment On October 03, 2008, at 4:50 PM, smithd1948 wrote:

    Quit with this reverse split garbage. We have lost enough on this stock as it is. Reverse split? Less stock AND we can watch it go down more. I don't care if it does go to the pink sheets. When things get better for the company the stock will go up. Don't give it more room on the downside

  • Report this Comment On October 03, 2008, at 5:14 PM, Fredlee009 wrote:

    Ahh, my buddy is back with his advice for Sirius and his reverse stock split idea. Companies that are trading under $1 as large and as much potential dont need to do desperate measures. Thats for companies going under. Sirius is about as far from going under as they were since the day they became a company. Actually day 1 of their existance was closer to bankrupcy than now. Your truley a "fool" and deserve to be writing on their blogs. A reverse split would make me happy, only if I can reverse split your opinions to make sense of them. Kind of like reverse engineering. Thank you for your unintelligent article full of no information.

  • Report this Comment On October 03, 2008, at 5:16 PM, Fredlee009 wrote:

    Please resign your position immediately, as you should not be writing financial articles.

  • Report this Comment On October 03, 2008, at 5:21 PM, Fredlee009 wrote:

    This stock is being manipulated. To argue the point with me would prove your naiviety and your lack of knowledge about how the market works. Of couser its being manipulated, a spec stock that never even challenges its mid level bollinger band in over a month(AT THESE LEVELS) Even dead bank stocks did that. So, if you have any credibility you can explain this anomoly for me. Im right here. The chart doesnt suggest manipulation, it actually says it quite plainly. Never rises more than a few cents, always gets beaten back. No new shorts allowed(no shares available) No selling interest(where did they buy it at? LOL LOL ) So why no test of bollinger or moving averages? Daaaaahhhh. But this author would rather talk about reverse splits than the obvious.

  • Report this Comment On October 03, 2008, at 5:30 PM, sl6209 wrote:

    To the right of this box is says "please be respectful with your comments." When you read Mr. I'm fixated on rev splits Rick's articles, it's hard to say anything nice, to be honest.

    First, smithd...don't worry, whichever company you're referring to, they don't use Rick's jibberish as any litmus or for any decision. You're fine on that front.

    Rick. My man, you are fixated on nonsense. Why? Believe it, we're all sick of hearing about your rejoices of who's next to reverse--and how happy you are about it. Let me hip you to something since you just don't get it. A reverse stock split is the LAST thing a "good" company will do when they are in trouble. BAD companies will certainly do this to help them selfishly, delusionally, think they are actually good. After they do it, the shorts will beat them right back down with an ugly stick, Rick. Why don't you tell the truth instead of skipping around twirling a long colored ribbon about reverse splits? Are you hard up for real content? A total waste of page space. Very few companies overcome reversing, Rick. Investors look for healthy companies, not unhealthy companies they know are posing as a wolf in sheep's clothing at a reversed higher price. A more attractive price? Rick...do you think investors are that stupid??? A reverse is the first tip a company is NOT healthy, Rick. Why don't you do some research and report the real facts, instead of this la dee da, warped world you live in. You scare me dude!! I actually can't believe The Motley Fool, which btw, loses a whole lot of cred for publishing your articles about nothingness, would even let this junk writing hit the web bearing their name. I thought The Motley Fool was supposed to be credible? Whenever your idiotic articles show up in anyone of my stock holding's mailboxes, I will be here to refute your lies...sorry.

  • Report this Comment On October 03, 2008, at 10:52 PM, lukematt wrote:

    From the article: "consumer-facing companies can't afford to be associated with dirt cheap prices". My response: Isn't it a pity when normal shareholders have the opportunity to buy low?

    From the article: "a pocket-change share price can hurt in other ways, as traditional media lays off on the fiscal accolades". My response: Does anyone nowadays still trust the traditional media? I've *never* purchased stock due to accolades from the news media.

    From the article: "a pocket-change share price can hurt in other ways, as...potential industry executives resist the urge to partner". My response: Are they partnering with the company or with the share price?

    In short, reverse splits (like share repurchase programs) are just another dirty trick designed by the market manipulators to screw normal shareholders.

    I agree with the commenter who wrote, "Please resign your position immediately, as you should not be writing financial articles." Munarriz is a shameless propaganda machine for the market manipulators.

  • Report this Comment On October 06, 2008, at 3:23 PM, gollygeewhizz wrote:

    I have to disagree with your comment about the "thrill-seeking teen". Right now Six Flags is soliciting annual passes for the 2009 season, (you get Frightfest '08 free). Someone learning the stock of the company he is about to subscribe to may expire long before his season pass does will certainly reconsider his investment. Would you buy a car from a company that won't be there to honor the warranty?

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