A well-known company has a super-high-priced stock. The company announces a stock split to make its share price more appealing to small investors. Investors applaud the decision and eagerly await the date of the split. When the day finally comes, the stock jumps.
That's the expected script. In reality, it doesn't always happen that way. Just look at Amazon's (AMZN 1.45%) 20-for-1 stock split in June. The much-anticipated event resulted in Amazon's share price falling instead of rising.
But you don't have to go back that far. Tesla (TSLA +0.57%) conducted a 3-for-1 stock split last week. And the stock pretty much did nothing. Here's why Tesla's stock split was a dud like Amazon's.
Early celebrations?
Could Amazon's and Tesla's stock splits have been anticlimactic because the celebrations were already over? Under this theory, investors had already driven up the share prices in anticipation of the event. When the date actually arrived, there was nothing left to cheer.
Amazon's stock movement supports this view. Shares of the e-commerce and cloud giant had been sinking for a couple of months until roughly two weeks before the split. But between May 23 and June 6 (the day of Amazon's stock split), Amazon's share price soared 16%.
NASDAQ: AMZN
Key Data Points
After the split, its stock proceeded to decline once again. Within a week, all of the gains that it generated during the two-week lead-up to the split had evaporated. This certainly seemed to be a phenomenon along the lines of "buy the rumor, sell the news."
However, it's a different story with Tesla. Shares of the electric vehicle maker jumped more than 30% in July. In the weeks before the company's stock split on Aug. 24, though, Tesla's share price didn't show any clear momentum, rising a little only to fall then repeat the cycle.
NASDAQ: TSLA
Key Data Points
At the time of this writing, Tesla stock is down somewhat from its level prior to the split. It remains to be seen if the stock will continue to decline or rebound once again.
Remember that one of the main purposes of stock splits is to attract small investors who can't afford to buy the stock at a higher price. If the stock price falls after the split, those small investors probably aren't jumping on the bandwagon in a game-changing way. Because of this, I don't think we can chalk up the letdowns in Amazon's and Tesla's cases merely to early celebrations.
Bad timing
There's a better explanation of what happened here: Both events were victims of bad timing. In particular, the timing of the companies' stock splits didn't occur when investors were eager to buy stocks.
Just a few days before Tesla's stock split last week, I made the case that the stock could enjoy a bigger post-split gain than Amazon did because of the timing. My main premise was that investors were more optimistic in the lead-up to Tesla's stock split than they were before Amazon's.
But I made my bullish argument only days before the Federal Reserve's annual symposium at Jackson Hole, Wyoming. Some warned that investors wouldn't be happy with Fed Chairman Jerome Powell's message. Those warnings were right.
Powell took a hard line in his comments made on Aug. 26. He stated that more interest rate hikes would likely be on the way that could cause "some pain" to the U.S. economy.
The bottom line is that Tesla's stock split was done during a week of considerable uncertainty for investors. It's hard to attract a massive wave of new small investors in such a climate. Amazon faced a similar challenge in June.
Wait and see
However, I think that it's way too early to write off either Amazon's or Tesla's stock splits as bona fide duds. Sure, neither stock popped immediately afterward. But investors should wait and see what happens when the market direction is clearly positive.
Sooner or later, we'll have another bull market. Investors will again be enthusiastic about buying stocks. There's a distinct possibility that much of that enthusiasm will be channeled toward Amazon and Tesla with the stocks available at lower prices resulting from their stock splits.
Stock splits have effective dates. But they don't necessarily have expiration dates.
