No matter how uncertain things may appear on Wall Street, investors will always seek out slivers of hope. Over the past two years, a consistent source of positivity for the investing community has been companies enacting stock splits.
A stock split is an event that allows a publicly traded company to alter both its share count and share price while having absolutely no impact on its market cap or operations. It's a cosmetic change that can make buying shares more nominally affordable for the average investor, such as with forward stock splits, or can ensure that a company remains listed on a major exchange by lifting its share price, such as with reverse stock splits.
Image source: Getty Images.
By and large, most investors flock to companies enacting forward stock splits. This type of split is undertaken by companies that have handily outperformed their competition and have seen their share prices soar, over time, as a result. Since the start of July 2021, eight high-profile companies have conducted stock splits.
While the outperformance of many recent stock-split stocks isn't lost on Wall Street's top billionaire investors, successful money managers are also aware that not every company enacting a split is created equally. Although we've witnessed select billionaires piling into what may be the next group of stock-split stocks, Form 13F filings also show that a handful of billionaire money managers are running away from another group of companies that appear primed for a split.
Mastercard
The first potential stock-split stock that at least one billionaire appears to be avoiding is payment processor Mastercard (MA +0.14%). In its 17 years as a publicly traded company, Mastercard has conducted one stock split (January 2014, 10-for-1).
Based on 13F filings from the March-ended quarter, billionaire Ole Andreas Halvorsen of Viking Global Investors has grown skeptical of the global payment-processing giant. Halvorsen oversaw the sale of nearly 912,500 shares of Mastercard in the first quarter, which more than halved Viking Global's stake at the end of 2022.
NYSE: MA
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The two likeliest reasons Halvorsen and his team were big-time sellers to kick off 2023 are recessionary fears and valuation.
In terms of the former, we've seen no shortage of economic indicators, recession-probability tools, and market metrics that have sounded a warning for Wall Street. Like most financial stocks, Mastercard is a cyclical company. If the U.S. economy slows or shifts into reverse, there's a very good chance consumer and enterprise spending will taper off as well. That would be bad news for Mastercard's sales and profit potential.
The other issue might be Mastercard's valuation. With a closing price north of $397 per share on July 21, Mastercard is commanding a price-to-earnings (P/E) ratio of nearly 37, based on the consensus earnings per share (EPS) in 2023 from Wall Street. With so many warning signs that economic weakness could be on the horizon, investors may be less willing to pay a premium for growth stocks.
However, both of these headwinds are extremely shortsighted in nature. Mastercard benefits from economic expansions lasting substantially longer than recessions, and it'll likely deliver sustained double-digit growth throughout the decade as it advances into underbanked regions of the world, such as the Middle East, Southeastern Asia, and Africa.
Furthermore, Mastercard strictly focuses on payment processing and has avoided dipping its toes into the lending arena. This conservative approach means not having to worry about loan losses and delinquencies when recessions do arise.
NYSE: AZO
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AutoZone
A second possible future stock-split stock that billionaire investors are running away from is auto parts retailer AutoZone (AZO 1.53%). Though AutoZone, whose shares closed at a whopping $2,457.93 on July 21, has conducted two stock splits since going public, the last of these splits occurred in April 1994.
Two billionaire money managers were quick to hit the sell button on AutoZone during Q1. Ken Griffin of Citadel Advisors oversaw the sale of 51,940 shares, which came close to halving his fund's position. Meanwhile, Jim Simons at Renaissance Technologies dumped 51,500 shares of AutoZone, which represented 81% of his fund's stake at the end of 2022.
Similar to Mastercard, the clearest headwind for AutoZone is the expectation that economic weakness is around the corner. Recessions tend to be challenging for most sectors and industries. More than likely, we'd see consumers pare down their discretionary purchases, which could slow AutoZone's sales and profit growth.
However, the company has two factors working in its favor that have been absolute moneymakers for long-term investors.
To start with, consumers are holding onto their vehicles for a longer period. Data from S&P Global Mobility, a division of the more familiar S&P Global, found that the average age of the 284 million vehicles currently registered in the U.S. is 12.5 years -- an all-time high. While this is a testament to auto manufacturers building more reliable vehicles, it's also a boost for auto parts suppliers that will undoubtedly be counted on to keep older vehicles running even longer.
The other interesting catalyst for AutoZone has been its aggressive share-repurchase program over the past 25 years. The company's board has authorized $35.7 billion worth of share buybacks since 1998, and as of May 6, 2023, completed $32.8 billion worth of repurchases. In total, 153.6 million shares have been bought back, which has provided a sizable lift to AutoZone's EPS.
Image source: Chipotle Mexican Grill.
Chipotle Mexican Grill
The third potential stock-split stock of the future that has billionaires running for the exit is fast-casual restaurant chain Chipotle Mexican Grill (CMG 0.17%). Chipotle, whose shares have climbed from an initial public offering (IPO) price of $22 in January 2006 to just shy of $2,099, as of July 21, has never conducted a stock split.
Form 13F filings from Q1 show that three billionaires were active sellers of Chipotle stock, including Israel Englander at Millennium Management, Jim Simons at Renaissance Technologies, and Bill Ackman at Pershing Square Capital Management. Englander and Simons oversaw the sale of 64,339 shares and 51,200 shares, respectively, which represent drawdowns of 64% and 89% from their stakes at the end of 2022. Meanwhile, Ackman's fund dumped 76,022 shares but still holds a little over 1 million shares of Chipotle stock.
Valuation looks to be the clearest reason for billionaires to lighten their positions in this future stock-split stock. On a trailing-12-month basis, Chipotle is valued at a nosebleed P/E ratio of 58. Even looking ahead to 2024, investors are paying a multiple of 39 times consensus earnings to own shares of Chipotle. That's exceptionally rich for a restaurant chain.
NYSE: CMG
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But similar to Mastercard and AutoZone, there are competitive advantages at work with Chipotle. The company's pledge to source some of its vegetables from local growers, as well as its promise to use responsibly sourced meats, has resonated with customers for a long time. As a result, it's been relatively immune to downturns and has had little trouble passing along higher prices to its loyal base of customers.
Furthermore, innovation is helping to push Chipotle Mexican Grill's shares ever higher. The introduction of Chipotlanes -- digital-order drive-thru pickup lanes -- roughly five years ago has paved the way for a more efficient ordering and operating process.
But this is one of the few instances where valuation may trump innovation. There's only so much restaurant chains can do in the innovation department to drive organic growth. Chipotle's sales needle simply can't move up fast enough to justify its lofty earnings multiple. Billionaires taking some of their chips off the table seems like a wise move.
