Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, though, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
That's why we pair up stock-split announcements with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think a company's long-term potential is outstanding, and the company is giving off bullish signals, maybe then investors should take notice.
Here are two stocks that recently split their shares or announced their intention to do so.
CAPS Rating (out of 5)
Current Share Price
|magicJack VocalTec (Nasdaq: CALL )
|Estee Lauder (NYSE: EL )
Source: Yahoo! Finance.
Don't blindly buy into a split -- you still need to do some research. Use the announcement as a jumping off point for additional research.
Can you hear me now?
Hoping to dial up future growth and keep its stock affordable, VoIP company magicJack VocalTec effected a 2-for-1 stock split last month that should also improve liquidity in its stock. At $24 a share pre-split, it wasn't exactly that pricey, but it was near its 52-week highs. The move could attract more attention to the stock.
Despite pioneering voice over IP calling and selling some 8 million magicJacks through some cheesy TV advertising, magicJack VocalTec isn't as well known in the stock world. Vonage (NYSE: VG ) and Skype have come to the forefront of the VoIP industry, with Vonage recently becoming profitable. Nevertheless, it was VocalTec that created InternetPhone back in 1995, and it merged with magicJack parent YMAX in 2010 to create magicJack VocalTec.
Just before splitting its shares last month, the VoIP innovator canceled a planned share offering that weighed on the stock beforehand because it would have diluted shareholders by about 14%. It said sales of a new model jack should give it the revenues it had been expecting from the offering.
CAPS member gameguru isn't enamored of management's seeming antics that have created a lot of movement in a short amount of time.
Something just plain smells fishy (the rancid, not so fresh kind of fishy) at this company. IPO occurred in July 2010 through a merger with "private foreign entity" vocalTec. Now a stock split and large follow-on offering announced on same day. Company insiders are getting rich - stockholders likely will not share the same fate.
I have to admit to arching an eyebrow or two as well, so I've gone to CAPS and marked magicJack to underperform the market. Add the VoIP operator to your watchlist to keep abreast of developments, and add your opinion of the split and other moves on the magicJack VocalTec CAPS page.
A pretty stock
Apparently the accuracy of the so-called "lipstick indicator" is proved once again. Coined by former Estee Lauder chairman Leonard Lauder, the indicator points to the rise in sales of affordable luxuries (like lipstick and makeup) during times of economic trouble as a sign of a faltering economy. The Dow Jones Industrial Average eked out a small gain, but coupled with the S&P 500's flat performance, it suggests a very weak market. Yet Estee Lauder returned almost 40% in 2011.
Cosmetics king Lauder saw profits rise 45% year over year in the first quarter of fiscal 2012, beating analyst expectations by 20%. Its skin-care segment drove higher, bolstered by new product innovations and sales in its travel segment.
On a valuation level, CAPS All-Star bradford86 thinks Estee Lauder is due for a pullback, but three-quarters of the other All-Stars rating the cosmetics purveyor were willing to plant a kiss on its cheek for further growth and an ability to outperform the market averages.
Tell us in the comments section below or on the Estee Lauder CAPS page why it should be a part of your portfolio, and add it to your watchlist to see whether this indicates a new growth phase.
Split the difference
Head over to the completely free CAPS service and let us hear what you have to say about these or any other stocks that you think we should split hairs over.
Then check out this special report from The Motley Fool, which found two companies that don't need foundation and makeup to change the face of retail. "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail" highlights two retailers growing revenue despite difficult times.