If you've always wanted to buy Sun Microsystems (Nasdaq: JAVA ) in the single digits, your days are numbered. Shareholders of the server giant will be asked to approve a 1-for-4 reverse stock split next week, catapulting its shares into the low $20s.
There's no free lunch, of course. A stock split -- either forward or reverse -- is a zero-sum game. Who cares if you have four shares of Sun at $6 or just one share at $24?
I'm the last person to usually rally around reverse splits, but I see the logic here. Sun has seen its shares stuck in the single digits for more than five years now. It's starting to get its act together, posting three strong quarters. However, with 3.6 billion shares outstanding, it's like tossing M&Ms into the Grand Canyon. The profits are amounting to just a few pennies on a per-share basis. Meanwhile, investors who are afraid of buying a low-priced stock are missing out on a company that has really turned the corner lately.
A reverse split is a humbling move. Sun's pedigree as a great tech stock will take a hit. After all, Sun has gone through six 2-for-1 stock splits since going public 21 years ago. But just because this is a reverse split doesn't mean the company is taking a step back.
I see other stocks meandering in the single digits that could use a reverse stock split of their own. Again, a reverse split isn't a catalyst. Fundamentals need to be what ultimately win fans back. However, if penny stock stigma is keeping investors away, a reverse split works if the company's future is brighter than its recent past. There's also the employee recruitment allure of a company whose stock doesn't appear to be stuck in the mud. Especially with tech companies where stock options are a major part of any executive compensation package, penny stock recruiters have it tough out there.
Here are a few companies I think should follow Sun's lead and take the reverse stock split walk of shame.
Sirius Satellite Radio (Nasdaq: SIRI )
In a storybook setting, Sirius is allowed to tie the knot with XM (Nasdaq: XMSR ) , realizing billions -- yes, billions -- in cost savings, while investors live happily ever after. The real world may not work out so pretty.
Sirius is growing quickly. Unfortunately, so is its share count. The company has nearly 1.5 billion shares outstanding. Just five years ago, Sirius had only 77.3 million shares outstanding, but additional shares haven't increased profitability for shareholders.
A reverse stock split won't change that, but it will take some of the speculative luster off a stock that's a regular on the "most actively traded" list because it has so many shares swapping hands at $3-ish.
TiVo (Nasdaq: TIVO )
The DVR pioneer needs to go back more than three years to recall the last time its stock traded in the double digits. Unfortunately, Wall Street's memory is as limited as a TiVo remote in going back further than an hour.
TiVo has a lot of cool things going on these days. Profitability is still scarce, yet the company continues to license its patented technology as it scales back on the subsidized hits it takes on the hardware side.
Taking TiVo from $7 to $28 with a quarter of the shares outstanding won't make it get to the promised land any faster, but it will help it shake the price share doldrums that have been lingering since Lost was found on TiVo boxes.
Six Flags (NYSE: SIX )
The regional amusement park operator has a good story to tell. After two seasons of family-friendly infusions, guest satisfaction is climbing and per capita spending is going through the roof.
The improvements haven't come cheap, and they're not paying immediate dividends on the bottom line. That finds creditors antsy and the stock fetching what you would pay for a small soft drink at some of its parks.
Now, Six Flags doesn't have the shares outstanding overhang that you find at Sun or Sirius. The company's burden is that it's saddled with $2.3 billion in debt. Obviously, a reverse split won't change that, but stability at higher prices may make a secondary stock offering a more appealing way to eat at that debt in the future. At the very least, a reverse split would help the company achieve a respectable share price in line with its steadier regional amusement park rival, Cedar Fair (NYSE: FUN ) .
IMAX (Nasdaq: IMAX )
Now that the big-screen giant has buried its accounting skeletons, it needs to win back credibility. It's not a matter of winning industry respect. It seems as if new international orders continue to trickle in every few weeks. Obviously, the company's product is in demand. However, with its stock fetching a fiver after the company failed to find a suitable suitor, IMAX is starving for a little Wall Street respect.
Jacking up its share price through a reverse split would price IMAX in line with multiplex operators that have recently gone public. It may not seem to make a material difference, but a little stability at higher price points may be just what it takes to smoke out a potential buyer to help it bankroll the company's aggressive expansion plans and migration to costly digital cinema projectors.
Going in reverse to go forward
That's it. Each company has unique circumstances as to why a reverse split -- even if it's a zero-sum game on paper -- may help investors in the end. I have nothing against low-priced stocks. In fact, I love 'em. However, I realize that most investors are uncomfortable delving into stocks with single-digit share prices. A reverse split should help.
Will they follow Sun's lead? Probably not. It's a shame, though. The best way to reverse the curse in some of these cases may very well be a reverse itself.
If you can't reverse your shares, reverse the clock to revisit these related stories: