Please ensure Javascript is enabled for purposes of website accessibility

Why Office Depot Stock Is Having a Wild Day on Tuesday

By Jon Quast – Jun 30, 2020 at 1:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is there a way to make a quick buck from the company's reverse stock split?

What happened

Shares of Office Depot (ODP 1.69%) were volatile on Tuesday, after the company confirmed its reverse stock split will proceed as planned. It appears that at least some investors are confused about what this means, and don't know how to best profit from the situation. 

During today's session, Office Depot stock has ranged from 3% down to 12% up, but it was more volatile than this in pre-market trading.

A woman shrugs in confusion against an orange background.

Traders were confused about Office Depot's reverse stock split. Image source: Getty Images.

So what

So what's the best way to trade this news from Office Depot? In reality, there isn't any good way. Stock splits and reverse stock splits do nothing to create or erode shareholder value. It's all relative.

Think about ordering a large pizza. Cutting it into 16 slices doesn't create more pizza than eight slices. The overall size of the pizza doesn't change; it's only distributed differently. In the same way, Office Depot's price per share will go up after its reverse stock split. But shareholder value won't be created. There will simply be fewer slices to the same size pizza.

Clever people might try to profit from Office Depot's stock split by using options. However, this is also futile. Option contracts are "made whole" after a split: They adjust at the same rate as the share price. 

So why is Office Depot doing a reverse stock split if it's truly meaningless for shareholders? The stock's price per share is low, and the major stock exchanges have listing requirements. If a stock falls too low, it risks being delisted. Therefore, Office Depot can get its share price back up now before it becomes a problem.

Now what

After the markets close today, Office Depot stock will undergo a 1-for-10 reverse split. As of this writing, the price per share is $2.20. If you hold 10 shares now ($22 in value), you'll own just one tomorrow. But it will be worth about $22 per share -- 10 times as much as today. 

It's important to know why you're buying a stock, and Office Depot's volatile trading tells me not everyone understood what was going on. That's unfortunate. But it's never too late to grow in your understanding of what can really drive shareholder value over the long haul. I believe anyone can learn how to invest in stocks and beat the market, if they're willing to put forth the effort.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The ODP Corporation Stock Quote
The ODP Corporation
ODP
$35.52 (1.69%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.