Jamba (NASDAQ: JMBA) investors had better not get too excited when they pull up a stock quote on Monday.
The shares may be trading in the low to mid teens, but it doesn't mean that the smoothie chain operator has come through with a fivefold pop in value. The Jamba Juice parent is simply the latest company to execute a reverse split.
After today's close, Jamba will complete a 1-for-5 reverse split. Every five shares will be exchanged for a single share worth five times as much. In theory, the move should prop up Jamba's share price from $3 to $15, but the value of the company will remain the same. It's a zero-sum game.
Executing a reverse split does have negative connotations, but that's not entirely fair.
A lot of companies going this route are fading companies that have seen their share prices fall below the $1 mark. These penny stocks go through reverse splits to maintain exchange listing requirements, but the fundamentals are still a mess.
Jamba isn't in that boat at all. It's trading well above the listing minimums, and its stock hit a three-year high last week. Many chains going this route are losing gobs of money, but Jamba posted its first annual profit last year. Wall Street sees it building on its newfound profitability this year.
In short, Jamba's the one making this call. It feels that having a share price in the double digits will attract institutional investors. It's a big gamble, especially since many companies that have gone the reverse split route have been hit with sell-offs in the immediate aftermath.
Jamba's story doesn't seem all that different than that of Sirius XM Radio (NASDAQ: SIRI). The satellite radio provider is also coming off a recent multiyear high. It did turn profitable after years of red ink. Its share price is also trading at $3 and change.
Sirius XM's former CEO Mel Karmazin didn't want anything to do with a reverse split. It was on the table when the company was flirting with minimum listing requirements a couple of years ago, but Karmazin quickly shot down the chatter once Sirius XM's stock was safely out of the sub-buck cellar.
However, with more than 6.6 billion fully diluted shares outstanding, it will be a long time before Sirius XM hits double digits as a $66 billion company organically. Aggressive share buybacks will help eat into the share count, but Sirius XM may want to keep an eye on Jamba to see how it fares as a company on the rise making the reverse-split gamble.
If Jamba can hold to a price in the mid teens and the stock moves higher as it hits the seasonally potent smoothie-slurping summer quarter, Sirius XM may have to reconsider its stance on reverse stock splits.
Despite Sirius XM being one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for it -- and plenty of room for it to fall if things don't. Read all about Sirius in The Motley Fool's premium report. To get started, just click here now.