There's good news and bad news for Under Armour (NYSE: UA ) shareholders today.
The good news is that the company behind the popular sweat-shaking performance apparel is about to give investors twice as many shares as they currently own. The bad news is that the stock price is about to be cut in half.
Yes, we're talking about stock splits. Under Armour will complete a 2-for-1 stock split in a couple of weeks.
The stock hit an all-time high of $103.32 just before the close on Friday, so there's a sound reason behind the move. Even though having twice as many shares priced at $51.66 is the same thing as the current share count at $103.32, there are plenty of investors who prefer to see low prices on their growth stocks. It gives the illusion -- however unjustified -- that shareholders are getting in early on the growth cycle.
Divide and conquer
Many stock splits are declared when a stock trades in the high double digits or barrels into the triple digits, but many bellwether tech stocks have been ignoring the practice in recent years.
Baidu (Nasdaq: BIDU ) waited until its stock was crossing the $700 mark before declaring a 10-for-1 split two years ago. There are a couple of big tech stocks trading in that vicinity that are ripe for a substantial stock split.
- Apple (Nasdaq: AAPL ) has come down a bit since peaking at $644 two months ago, but this week's WWDC '12 powwow may very well be the catalyst for another move up. Historically speaking, Apple has never waited this long. Apple declared 2-for-1 stock splits in 1987, 2000, and 2005. In all three instances Apple's stock was trading in the high double digits.
- priceline.com (Nasdaq: PCLN ) also hit a new all-time high two months ago. The "name your own price" travel portal hit $774.96, before succumbing to this quarter's market correction and a quarterly report that was solid but apparently not solid enough. It's still surprising to see Priceline holding out. Shortly after the dot-com bubble popped, it declared a 1-for-6 reverse stock split -- exchanging every six shares of its low-priced stock for a single new share at six times the price -- in 2003. There's something ironic about a company providing great deals on travel experiences but trading at such a high price.
- Intuitive Surgical (Nasdaq: ISRG ) has revolutionized the way that some common surgical procedures are performed through its da Vinci robotic arm platform. Surgeons are less fatigued. Hospitals get more procedures done. Patients, on average, enjoy quicker healing times. Everybody wins. The stock's been on a tear over the years, peaking near $600 two months ago.
Splits the uprights
One can always argue that stock splits aren't necessary these days. Brokerage commissions are cheap enough to the point where nobody has to buy stocks in round lots of 100 anymore. If you only have $5,000 to invest in a single company, there's no shame in buying eight shares of Apple.
However, companies with meaty prices appear to be wearing their lofty sticker tags as badges. It's almost as if these companies have private wagers set up to see which one will hit $1,000 first.
It's hard to argue with success, of course, but shouldn't companies be thinking about retail investors here? It's not just psychological reasons that have fueled stock splits in the past. What about nervous investors who prefer to use options as a strategy to reduce risk?
An investor can't sell a single covered call -- where a shareholder pockets a premium on the sale of the call option and only has to give up the underlying shares if the price hits or exceeds the higher strike price -- without buying a round lot of 100 shares first.
That may be an extreme example, but there's little to lose by going through with a stock split. The market's lifting shares of Under Armour to yet another all-time high this morning on the 2-for-1 news. Maybe it's not a zero-sum game after all.
Baidu and Intuitive Surgical have been winners for Rule Breakers newsletter subscribers. They don't mind the triple-digit share prices. However, now it's time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.