Although Wall Street can be unpredictable, one certainty among investors is that they'll seek out the positive in virtually any situation.
With the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite falling into a bear market in 2022, investors have eagerly looked for the proverbial light at the end of the tunnel. For many, companies enacted stock splits have been that ray of sunshine.
A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count without impacting its market cap or ongoing operations. It's a cosmetic change that either makes a company's share price more nominally affordable for investors without access to fractional-share purchases (i.e., a forward stock split) or increases a company's share price to ensure it remains listed on a major exchange (reverse stock split).
Image source: Getty Images.
A majority of investors flock to companies enacting forward stock splits. That's because companies enacting forward splits are typically out-innovating their competition, which explains why their stock has outperformed in the first place. Over the past two years, four high-flying growth stocks have completed stock splits:
- Alphabet (GOOGL +0.09%)(GOOG +0.12%), the parent of globally dominant internet search engine Google (which accounts for 93% of global search share) and streaming platform YouTube, enacted a 20-for-1 stock split in July 2022.
- Amazon (AMZN +0.22%), the e-commerce platform that's responsible for approximately 40% of U.S. online retail sales, completed a 20-for-1 forward stock split in early June 2022.
- Tesla (TSLA 3.64%), the electric-vehicle (EV) manufacturer that's made history by becoming the first automaker to successfully build itself from the ground up to mass production in over a half-century, conducted a 3-for-1 stock split in late August 2022.
- Nvidia (NVDA +0.05%), whose artificial intelligence (AI)-driven graphics processing units command the bulk of AI-focused data center market share, finished a 4-for-1 stock split in July 2021.
Companies splitting their stock have, at least recently, been outperformers on Wall Street. The question is, which companies are set to become the next stock-split stocks? The following four stocks appear to be the logical candidates.
NASDAQ: AVGO
Key Data Points
Broadcom
Semiconductor solutions specialist Broadcom (AVGO 0.07%) is the first company where a stock split would make a lot of sense. Although Broadcom has previously split its shares, Avago, which acquired Broadcom in February 2016 and kept the Broadcom name, has never split its stock. Following a roughly 2,100% increase in its share price over the trailing 10 years, a single share of Broadcom will set buyers back $822!
Broadcom is probably best-known for its wireless chips and accessories used in next-generation smartphones. The steady rollout of 5G infrastructure and faster download speeds is expected to entice businesses and consumers to upgrade their wireless devices. This steady replacement cycle should fuel Broadcom's sales growth and backlog for years to come.
But what's been catching Wall Street's attention in 2023 is the role Broadcom plays in data centers and vehicles. On top of seeing relatively steady growth in data-center connectivity and access chips, shares of Broadcom have caught fire this year on the hope that its AI-derived chip sales will double to about $1 billion per quarter, according to CEO Hock Tan.
Image source: Chipotle Mexican Grill.
Chipotle Mexican Grill
A second stock that stands out as a no-brainer to eventually split its shares is fast-casual dining chain Chipotle Mexican Grill (CMG +0.67%). Chipotle's shares have surged 9,189% since the company's initial public offering price of $22 in 2006, and it's never conducted a stock split. A single share will set investors back more than $2,000.
Sometimes investors don't have to dig too far below the surface to discover what's working for a business, which is precisely the case with Chipotle. One reason it's outperforming its peers is its food. The company only deals with fresh foods that are prepared daily, and it goes to great lengths to ensure that most vegetables are locally sourced and the meats used are responsibly raised. Consumers have gravitated toward healthier/organic food options over the past two decades, and Chipotle's success is confirmation of the power of this trend.
Additionally, Chipotle Mexican Grill is winning with innovation. In 2018, the company introduced Chipotlanes as a way for consumers to place their order digitally and pick up their order through drive-thru lanes. This was followed up three years later with the first Chipotlane digital kitchen, which is specifically geared to handle digital orders.
With sustained double-digit sales growth, Chipotle is clearly doing something right.
NYSE: AZO
Key Data Points
AutoZone
The third company that could be the next logical stock-split stock is auto parts chain AutoZone (AZO 0.30%). The last time AutoZone split its stock was April 1994. Over that time, AutoZone's share price has skyrocketed by 9,133% to north of $2,400 per share.
One of the key reasons AutoZone has been such a top-performer for so long is the company's capital-return program. While it doesn't offer a dividend, AutoZone's board has approved an aggressive share repurchase program. Since fiscal 1998 (the first year the company began repurchasing its shares), AutoZone has bought back 153.6 million shares of common stock equating to $32.8 billion. With only 18.23 million shares left outstanding, AutoZone may have to split its shares just to keep repurchasing them.
The other catalyst for AutoZone is the age of existing vehicles on America's roads. According to recent data from S&P Global Mobility, a division of S&P Global, the average age of the 284 million vehicles registered in the U.S. is 12.5 years. That's an all-time high, and great news for a company that supplies auto parts and accessories to keep older vehicles running.
NASDAQ: COST
Key Data Points
Costco Wholesale
The fourth company that could become the next stock-split stock and follow in the footsteps of Alphabet, Amazon, Tesla, and Nvidia is warehouse club Costco Wholesale (COST +1.06%). Costco hasn't split its stock since January 2000 and has delivered a stellar return of approximately 1,000% since then, not including dividends. As of this past weekend, a single share of Costco was nearly $525.
The secret sauce to Costco's long-term outperformance has to do with its buying power and membership-driven operating model. In terms of the former, Costco uses its size and deep pockets to purchase most of the products in its stores in bulk. Buying in large quantities means lower per-unit costs, which it can then pass along to its members in the form of lower prices and use as something of a dangling carrot to attract new members to its stores.
Costco's membership model is also a big reason for its success. The company generates razor-thin margins on the grocery products it sells, but rakes in juicy margins from the annual memberships sold to customers and businesses. These annual fees ensure Costco can undercut most retailers on price.
A stock split could be just what's needed to put this steady winner on the radars of everyday investors.
