Would a Reverse Split Help These Stocks?

Companies get in trouble when their share price falls too low. Yet while reverse stock splits have the power to get companies out of trouble with listing regulations, they don't always work the magic necessary to resurrect a stock's profit-making potential.

A quick fix
When a stock lingers below the $1-per-share watermark for too long, the exchange advises the company to get its act together. Often, though, all it takes is a reverse split to push shares above $1 and make the stock suddenly worthy of inclusion again, even if the total market value of the company never changed. This possibility is always fresh in the minds of Sirius XM Radio (Nasdaq: SIRI  ) shareholders, as the stock has a seemingly chronic attraction to that troublesome dollar-per-share benchmark.

The widely held superstition that reverse splits always come undone as the stock wanders back toward the danger zone again may be going away, thanks to a spate of reverse splits for generally respectable companies that never were in real danger of delisting. In the case of Sirius, it just might be what the doctor ordered.

But then there are cases where a reverse split still wouldn't be enough. Take a look at these stocks, for example:

Company

Recent Price Per Share

Under $1 Since

Market Cap (millions)

CAPS Score (out of 5)

Citizens Republic Bancorp (Nasdaq: CRBC  )

$0.84

July 27

$323

**

Cell Therapeutics (Nasdaq: CTIC  )

$0.38

March 19

$288

***

Delta Petroleum (Nasdaq: DPTR  )

$0.69

June 24

$200

*****

Capstone Turbine (Nasdaq: CPST  )

$0.70

July 12

$168

***

Evergreen Solar (Nasdaq: ESLR  )

$0.62

May 19

$130

***

StemCells (Nasdaq: STEM  )

$0.80

June 29

$101

**

Source: Motley Fool CAPS and Google Finance.

All of these stocks have been under the magical $1 limit longer than allowed and are fighting delisting processes as we speak. But in a couple of cases, simply boosting the price per share might still fall short of Nasdaq requirements for continued listing. There's more to a stock listing than just keeping your nose above that particular water level.

A bridge over troubled waters?
You also have to meet one of four clearly defined combinations of positive income, positive cash flows, revenue, assets, shareholders' equity, and market capitalization. In the case of StemCells, the company can't meet any of these requirements mostly due to a string of unfortunate drug approval decisions by the Food and Drug Administration. A reverse split would most likely do no good here, though the company might meet the least stringent market cap limit of $160 million if a few key events go the right way.

Fellow drug developer Cell Therapeutics easily meets that $160 million cap requirement but falls short on total assets and stockholder equity for the most recent fiscal year. Short of landing the mother of all Hail Mary passes in an FDA appeal this fall, Cell Therapeutics may not recover even with a reverse split.

Delta Petroleum is a five-star CAPS stock despite its long history of failed listing tests. This time, we have lots of assets and plenty of shareholder equity on the books. It's also a turnaround story in the making, and it would be a shame for management to let the stock drop off the Nasdaq. This looks like a great spot to do a reverse split.

Like Delta, Citizens Republic and Evergreen Solar would be A-OK if only their share prices would rise back over that $1 threshold. Due to a vanishingly low equity balance, Capstone is not as lucky. The green energy revolution can't start fast enough for this company, because a simple reverse split isn't enough to get it out of trouble.

How do I know the difference?
Every situation is unique, and the exchanges have a history of leniency in these delisting processes. A reverse split may not always be the best way to hurry things along, but in many cases it wouldn't hurt much, either. The fees for filing a split -- forward or reverse -- runs in the thousands of dollars, not millions.

Regardless, it's a good reminder that just because a stock is cheap doesn't mean it can't get cheaper. Although some reverse splits will help catapult a stock out of danger, others will prove to be unsuccessful at anything but prolonging the inevitable.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (6) | Recommend This Article (5)

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 September 17, 2010, at 10:06 PM, themaxpain wrote:

    /sigh

  • Report this Comment On September 17, 2010, at 11:16 PM, southernbeachguy wrote:

    R/S are evil!!!!

    I have followed 7 stocks that have reversed and all 7 were shorted to death and went down. If you look at some of why these are below 1.00 you'll see a R/S won't help. CTIC was a darling for 6 months then they went before the FDA and were crucified with disapproval. Until they get their FDA troubles cleared up nothing will help them.

    Sirus is a darling now with 4 straight quarters of positive financials and no competition. Sirus is worth at least double their PPS.

  • Report this Comment On September 17, 2010, at 11:49 PM, Hellbentisback wrote:

    This possibility is always fresh in the minds of Sirius XM Radio (Nasdaq: SIRI) shareholders, as the stock has a seemingly chronic attraction to that troublesome dollar-per-share benchmark.

    ---------------------------------------------------------------

    The FOOL has a chronic attraction of begging for hits by using SIRI as a tag. A reverse split is only FRESH in the minds of your writers that are working for you. Certainly not mine or other long term share holders.

    Become a professional resource and stop with the amateurish tactics.

    Just Stop it.

  • Report this Comment On September 18, 2010, at 7:19 AM, bridgesafe wrote:

    enough with the reverse Bull Crap, Motley Fool, if siiri has a reverse the short sellers bash and short siri back to its current price in 6 months, find something worth posting an article about or shut the #%^* up

  • Report this Comment On September 29, 2010, at 9:39 AM, markrm1 wrote:

    Check out FBC to see how well a reverse split worked. Stock fell to 45 cents, 1 for 10 r/s to $4.50 and now it's a buck eighty three. Reverse splitting is just an accounting artifice, or in the b/d vernacular, lipstick on a pig.

  • Report this Comment On December 30, 2010, at 4:10 PM, Gagoka wrote:

    FBC did a 10 to 1 r/s (from $0.50 to $5.0 something) to attract institutional investors but then were shorted to death and went down back to $1 something, which is equivalent to 10 cents (had they have not done the reverse split).

    I think if they have not done the reverse split, I doubt that the price would go down to 10 cents something.

    I think the FBC reverse split was a BIG mistake. They should have done something else other than r/s.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1304965, ~/Articles/ArticleHandler.aspx, 9/15/2014 12:06:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement