Will Sirius XM Follow E*TRADE's Lead?

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Shares of E*TRADE (Nasdaq: ETFC  ) are just a few trading days away from catapulting into the teens.

Hold those buy orders. The discount broker's stock is poised for a tenfold pop in price a week from tomorrow, but it will only be the zero-sum result of a 1-for-10 reverse split.

E*TRADE announced its intent to split earlier this year, and shareholders approved the operation two weeks ago. Using yesterday's close of $1.46 as an example, an investor with 1,000 shares valued at $1,460 will end up holding 100 shares valued at $1,460. The cost basis is adjusted accordingly, so the tax implications remain the same.

Companies usually execute reverse splits to achieve exchange minimum listing requirements, or to have the higher share price trigger a psychological boost. E*TRADE's motivation is the latter. It hasn't broken down below the $1 mark for a long enough period to draw Nasdaq's ire. However, it has been waffling around in the low single digits for a long time. You have to go back 27 months to find the last time the stock E*TRADE fetched more than $5 a pop.

Even if E*TRADE's split amounts to little more than mathematical parlor magic, getting its stock into the teens would help ease the peer pressure it feels in its sector. Rivals TD AMERITRADE (Nasdaq: AMTD  ) and Charles Schwab (Nasdaq: SCHW  ) are currently perched in the teens.

Your move, satellite radio
Some low-priced stocks will be eyeing E*TRADE's post-split performance carefully.

Shareholders of NovaMed (Nasdaq: NOVA  ) , an operator of ambulatory surgery centers, approved a 1-for-3 reverse today that could catapult its stock price into the double digits for the first time in nearly 10 years.

The recent popularity of reverse splits makes sense, especially since the few companies that went this route last year failed to implode.

The more prolific company that's likely to pay some attention to the market's reaction to E*TRADE is Sirius XM Radio (Nasdaq: SIRI  ) . The satellite-radio provider has until the end of next month to execute a reverse split.

But Sirius doesn't need to go through with it. Unlike E*TRADE or NovaMed, Sirius XM asked for shareholder approval when Nasdaq OMX Group (Nasdaq: NDAQ  ) threatened to delist the company for failing to trade above the $1 mark.

Sirius XM is back in compliance as of last month, and CEO Mel Karmazin has indicated that he won't go through with the split for cosmetic reasons alone. The reverse was simply a matter of last resort to be used if Nasdaq was serious about booting the company. That point is moot now.

Sirius XM's shares are once again teasing with the wrong side of the decimal point, but it would take several months of noncompliance before delisting would be a consideration.

Think it over
That doesn't mean Sirius XM should abandon the thought of a reverse stock split altogether. May has been a month of great news for the company. It began by posting better-than-expected quarterly results and has gone on to raise its guidance.

Despite the applause-worthy events, the stock traded as low as $0.94 a share this morning before bouncing back. The crackling market clearly isn't helping Sirius XM get its good news heard, but reality is also sinking in. Now that Sirius XM is profitable, Liberty Capital's (Nasdaq: LCAPA  ) 40% preferred share stake is starting to work its way into the diluted share count. There were 6.3 billion -- yes, billion -- fully diluted shares outstanding counted in last quarter's income statement.

Is it just as hard to move 6.3 billion shares at $1 than it is to move 630 million shares at $10? Absolutely. However, it also makes it that much harder to justify per-share price points of $3 or $5 that would attract more institutional investors, given Sirius XM's current fundamentals.

Let's keep an eye on E*TRADE in the latter half of next week. If the market doesn't pummel the discount broker for going with a reverse stock split, Karmazin may want to rethink his stance.

What's that? You're still unsure about whether to get a new broker? Get thee to our Discount Broker Center to learn more and compare some sponsored commission schedules.

Nasdaq OMX Group is a Motley Fool Inside Value selection. Charles Schwab is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a write covered calls position on Nasdaq OMX Group. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He owns no shares in any of the stocks mentioned in this article and is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.

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

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 May 25, 2010, at 3:50 PM, ibEddy wrote:

    Talk, talk, talk, so much talk! Hamlet is it you?

    Ed Mincher











  • Report this Comment On May 25, 2010, at 4:08 PM, southernbeachguy wrote:

    NO R/S!!!! Shorts will kill Siri if they Split. Look at ANX. 5 weeks ago it split to 4.65, it ended today at 1.92. It has lost every day since the split AIG is lower. Every stock that I have watched over the past 5 years that has split has Lost more. Traders have found that they can make more money Shorting stocks than investing in them. A R/S is never the answer.

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10/21/2016 4:00 PM
ETFC $29.50 Up +1.30 +4.61%
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SIRI $4.15 Up +0.02 +0.48%
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