Every so often, Wall Street sends investors a not-so-subtle reminder that stocks don't move up in a straight line (even if 2021 made you believe they did). This has been one of those years.
Since hitting their all-time highs, the iconic Dow Jones Industrial Average, benchmark S&P 500, and tech-heavy Nasdaq Composite have respectively lost as much as 22%, 28%, and 38% of their value. This entrenches all three major U.S. stock indexes in a bear market.
Image source: Getty Images.
Stock splits have been Wall Street's silver lining in a trying year
But in spite of burgeoning pessimism and double-digit percentage declines across most sectors and industries in 2022, investors have still found a silver lining with stock-split stocks.
A "stock split" is an event that allows a public traded company to alter its share price and outstanding share count without having any impact on its market cap or underlying operations. Although stock splits are a two-way street (i.e., a company's share price can be adjusted in either direction), what investors tend to be most excited about are forward stock splits.
More than a half-dozen widely owned stocks have conducted forward stock splits this year. This type of split reduces the share price of a company's stock to make it more nominally affordable for everyday investors. Instead of having to save up hundreds or perhaps thousands of dollars to buy a single share of stock (assuming an investor has no access to fractional-share purchases), forward stock splits make single-share purchases easier to come by.
Forward stock splits can also act as a signal that alerts investors to top-performing stocks. Companies splitting their shares have often delivered strong or sustained sales and profit growth, and in many instances are out-innovating their competition. In other words, these are the types of businesses with a chance to shine, even during a bear market.
Though there have been few outperformers on a year-to-date basis, two stock-split stocks have been handily crushing the bear market of late.
NASDAQ: SHOP
Key Data Points
Shopify: 27% gain during the month of October
The first stock-split stock that's been absolutely running circles around the bear market in recent weeks is cloud-based e-commerce platform Shopify (SHOP 1.42%). Shares of Shopify logged a healthy 27% gain during the month of October, albeit this followed an absolute shellacking since hitting its all-time high in November 2021.
Shopify, which conducted a 10-for-1 forward stock split on June 29, 2022, has been riding high since reporting its third-quarter operating results. Although its recent resurgence is based on a smaller-than-expected quarterly loss and a "revenue beat" relative to what Wall Street had expected the company to report in the September-ended quarter, it's the company's key performance indicators that deserve a closer look.
To begin with, it's worth noting that Shopify's total sales were hurt by a historically strong U.S. dollar during the third quarter. Removing currency movements from the equation would yield 24% revenue growth from the prior-year period. Even accounting for high inflation, which is driving consumers to spend more, the takeaway is that Shopify is gobbling up retail commerce share in multiple channels.
To add to this point, Shopify is picking up market share in brick-and-mortar stores. Shopify President Harley Finkelstein noted in an interview with CNBC following the release of his company's operating results that physical retail gross merchandise volume rose 35% in the latest quarter from the prior-year period.
Innovation is playing a key role in continuing to move the needle for Shopify as well. The introduction of buy now, pay later service Shop Pay in 2021 provides its merchants with another tool they can use to grow their business. Shopify stated last year that small businesses represent a $153 billion addressable opportunity for the company.
However, the retail environment will, undoubtedly, remain challenged for the foreseeable future. Historically high inflation is pinching the wallets of low-earning consumers and making small businesses think twice about upgrading to Shopify's higher-margin subscription services. With Shopify choosing to grow its point-of-sale market share and spending fairly aggressively on innovation in the near-term, it wouldn't be surprising to see bottom-line losses extend into 2023. But over longer run, where periods of economic expansion last disproportionately longer than contractions and recessions, this decision should benefit Shopify and its shareholders.
DexCom's continuous glucose monitors provide a way for diabetes patients to monitor their blood glucose level without regular finger pricks. Image source: Getty Images.
DexCom: 50% gain during the month of October
The second stock-split stock that's completely crushed the bear market of late is medical-device company DexCom (DXCM 2.67%). During the month of October, shares of DexCom rocketed higher by a cool 50%.
DexCom, which completed a 4-for-1 forward stock split on June 10, 2022, has been flying for the exact same reason as Shopify: better-than-expected quarterly results. Both the company's sales and adjusted earnings per share surpassed the consensus of analysts. And like Shopify, there are bigger things at work here than just headline numbers topping Wall Street's expectations.
For starters, continuous glucose monitoring (CGM) system developer DexCom benefits from the generally defensive nature of healthcare stocks. No matter how poorly the stock market or U.S. economy perform, people don't suddenly stop getting sick or requiring medical care. There's a relatively safe demand floor beneath most prescription-drug and medical-device developers.
NASDAQ: DXCM
Key Data Points
More specific to DexCom, its prospective patient pool continues to grow. According to the Centers for Disease Control and Prevention, 37.3 million Americans have diabetes and 96 million additional U.S. adults have prediabetes, which can turn into full-blown diabetes if left untreated. These figures have been steadily climbing over the years, suggesting that DexCom's CGM systems have an ever-growing use case.
Similar to Shopify, DexCom has been lifted by innovation. The company has introduced multiple generations of CGM's for diabetes patients, the latest of which is known as the G7. This continued innovation has led DexCom to become one of the world's two-largest CGM manufacturers and is sustaining annual sales growth of nearly 20%.
The one and only blaring knock against DexCom is its valuation. Most investors are unwilling to pay a premium for stocks during bear market declines. Following its run-up, shares of DexCom are priced at 102 times Wall Street's forecast earnings for 2023. While the company's sustained growth and addressable market have certainly earned it a premium, it's not clear if a triple-digit forward price-to-earnings ratio will be sustainable in a bear market.
