A look at last year's stock-split companies is kind of like taking a stroll along Hollywood's Walk of Fame. It's star-studded, featuring the industry's biggest names. Amazon (AMZN 3.20%), Tesla (TSLA 0.01%), Alphabet (GOOG 1.75%) (GOOGL 1.68%), and Shopify (SHOP 2.27%) were among the market giants to complete stock splits after seeing their shares soar in recent years.
Everyone says a stock split isn't a catalyst for share-price performance. And it's true that after the "operation," the particular stocks I just mentioned didn't significantly rise or fall. But since the beginning of this year, they've taken off, rising in the double and even triple digits. So, could a stock split actually be a signal for gains down the road -- and a reason to buy? Let's find out.
Stock prices that have climbed
First, a bit of background on stock splits. Companies usually launch these operations when their stock prices have climbed significantly, putting them out of reach for many investors. Of course, these days investors could opt to buy fractional shares and get in on certain companies trading for hundreds or thousands of dollars a share. But certain brokerages don't offer fractional shares, and in some cases, an investor might prefer buying full shares.
All of this means a stock split does indeed make a particular stock more accessible to a broader range of investors by lowering the price of each individual share. This doesn't change the market value of the entire company -- or of your holding if you're already a shareholder. Imagine a stock is worth $1,000. In a 10-for-1 stock split, as a shareholder you would get 10 shares for every one you already own. But your investment still would total $1,000.
OK, so now, back to our top-performing stock-split stocks. As the chart, below, shows, they're soaring this year.
But before you credit the stock split, hold on. It's also important to note that these stocks, all high-growth players, sank last year amid concerns about higher interest rates and a weakening economy. The fact that all three benchmark indexes entered a bear market didn't help -- these market environments don't favor growth stocks.
Close to a bull market
This year, though, the indexes have recovered and even are close to transitioning into a bull market, an environment known to boost growth players. Meanwhile, each of these companies I've mentioned has either made progress in a recovery plan or has successfully managed the difficult economic environment.
For example, Amazon, after reporting a loss last year and an outflow of cash, has since reported quarterly profit and positive cash flow. Tesla has managed to report record electric vehicle production and delivery figures, and to continue increasing earnings.
The general market environment and company news have been pushing these stocks higher since the start of the year. And all of this supports the idea that stock splits don't have anything to do with these companies' gains.
But this doesn't mean we should completely toss stock splits out of the equation. They don't equal stock market gains, but they may help guide us toward quality companies. Here's why. Companies that launch splits are companies that have been successful in the past, prompting their share prices to explode. These companies also have a certain amount of confidence in the future. The idea is the newly lowered share price will attract new investors and once again climb over time -- if the company continues to grow.
What does this mean for you as an investor?
You shouldn't jump into all stock-split stocks and expect near-term or long-term gains. A company may have done well in the past, but internal or external factors could make the future less certain.
Instead, you should use stock splits simply as a starting point. If a company is launching a stock split, its shares have done well, and there's probably a reason for that. Does the company have what it takes to repeat this performance down the road? That's the question we should try to answer by looking at the player's market position, financial situation, and earnings prospects.
If all looks positive, then we might want to consider buying shares of this stock-split player. The split itself won't boost the shares, but the good news is many other factors could.
