If you want to make money investing in the stock market, there's an endless array of popular strategies. Scooping up stocks before they split their shares is one strategy that's worked out well in recent years.
From time to time, shares of successful companies rise so high that everyday investors begin to shun them for no other reason than their high share price. Stock splits allow companies to lower their stock prices to levels within reach of everyday investors by turning one share into 10, for example.
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In theory, multiplying the number of outstanding shares by a specific amount should lower the price by an equal magnitude In practice, though, the extra attention that surrounds stock splits tends to drive their prices higher.
A little over two years ago, investors began flocking to Nvidia (NVDA 6.18%) after it enacted a 4-for-1 split. Since then, at least a dozen successful companies saw their prices soar after joining the stock-split party, including:
- Intuitive Surgical (ISRG 0.59%): a 3-for-1 split announced in August 2021
- Alphabet (GOOG 9.96%) (GOOGL 10.22%): a 20-for-1 split announced in February 2022.
- Amazon (AMZN 3.43%): a 20-for-1 split announced in March 2022.
- Dexcom (DXCM -9.90%): a 4-for-1 split announced in March 2022.
- Shopify (SHOP 1.11%): a 10-for-1 split announced in April 2022.
- Palo Alto Networks (PANW 0.91%): a 3-for-1 split in August 2022.
Some of the most successful money managers Wall Street's ever known are paying attention to these stock-split stocks, too. With the latest round of disclosures institutional investors are required to make each quarter, we know which ones billionaires are buying hand over fist. We can also see what they're selling, and you might be surprised.
Nvidia is a stock-split stock billionaires are buying with both hands
During the three months that ended June 30, billionaire money managers were tripping over each other on their way to buy shares of Nvidia.
- Jeff Yass and Susquehanna International, the fund he manages, bought more than 5.4 million shares of the graphics processing unit (GPU) designer.
- James Simons of Renaissance Technologies acquired 1.9 million shares.
- John Overdeck and David Siegel of Two Sigma Advisers bought 1.6 million shares.
- Israel Englander of Millennium Management added more than 1 million shares, raising the company's holdings in the GPU designer past $1 billion.
- David Tepper and Appaloosa added 870,000 Nvidia shares to its portfolio.
Artificial intelligence (AI) means different things to different people. In the end, though, AI applications generally need GPUs to function.
Nvidia sells the vast majority of GPUs used to power AI applications, and the recent proliferation of services such as ChatGPT has translated into soaring sales and profits for its investors. In the second quarter, Nvidia reported data center sales that soared 171% year over year to $10.3 billion.
As the leading producer of GPUs that power AI applications, Nvidia has a lot of pricing power, and this advantage shows on its bottom line. The company earned $8.2 billion in the first half of 2023, a 262% gain over the previous-year period.
Shares of Nvidia are currently trading at around 42.5 times Wall Street's forward-looking earnings estimate. A multiple this high would be difficult for almost any stock to overcome, but Nvidia's pricing power is probably strong enough that investors buying at recent prices could realize market-beating gains over the long run.
Stock-split stock that billionaires sold heavily in the second quarter: Dexcom
One stock-split stock that saw aggressive selling from billionaire fund managers in the second quarter was Dexcom, the manufacturer of continuous blood-glucose monitors. A slew of prominent billionaires dumped the stock in the second quarter, including:
- Ken Griffin at Citadel Advisors (sold 3,780,330 shares).
- Steven Cohen at Point72 Asset Management (sold 1,541,082 shares).
- Israel Englander at Millennium Management (sold 771,329 shares).
- John Overdeck and David Siegel at Two Sigma Investments (sold 196,180 shares).
Dexcom's next-generation CGM, the G7, earned FDA approval last December. Strong uptake of the new device in the U.S. and abroad is driving growth. Second-quarter sales surged 25% year over year, and plenty of revenue is filtering down to the bottom line. According to generally accepted accounting principles (GAAP), operating income during the second quarter came in at $128.1 million, or 14.7% of revenue.
Sales of Dexcom's G7 device are pushing its needle forward, but Abbott Laboratories had a long head start in the U.S. market with FreeStyle Libre 3, a CGM the size of two stacked pennies, significantly smaller than Dexcom's G7 device.
Despite the challenge Abbott's CGM presents, Dexcom is trading for the lofty multiple of 82.7 times forward earnings estimates. While its business is likely to continue growing at a healthy pace, expecting it to maintain a pace that justifies such a lofty valuation seems unreasonable given the competition. If I were holding this stock, I'd continue to do so. However, I wouldn't criticize anyone for following the lead of billionaires who recently trimmed their richly valued positions.
