Volatility is a given when putting your money to work on Wall Street. Although the major stock indexes have lengthy track records of increasing in value over the long run, we've navigated two bear markets since this decade began.
When the going gets tough on Wall Street, investors -- including members of Congress -- have often turned their attention to time-tested, industry-leading businesses that offer a rich history of outperformance. While the "FAANG stocks" are a perfect example of what I'm talking about, it's companies enacting stock splits that investors (and lawmakers) have gravitated to.
Image source: Getty Images.
Investors (including lawmakers) are flocking to stock-split stocks for a good reason
A "stock split" is an event that allows a publicly traded company to alter its share price and outstanding share count by the same magnitude, all without any impact to its market cap or operating performance. It's a purely cosmetic maneuver that can make a company's shares more nominally affordable to everyday investors, as with a forward-stock split, or can increase a company's share price to ensure continued listing on a major stock exchange, as would be seen with a reverse-stock split.
For all intents and purposes, most investors tend to hone in on companies enacting forward splits. While there are select instances where companies enacting reverse splits have gone on to be phenomenal investments (perhaps none more so than online travel booking site Booking Holdings), companies enacting forward-stock splits are typically firing on all cylinders from an operating standpoint.
Since the midpoint of 2021, almost one dozen high-profile companies have completed or announced a forward split. Some of the most-prominent of these companies includes e-commerce behemoth Amazon (AMZN +1.93%), internet search giant Alphabet (GOOGL +1.11%)(GOOG +1.00%), and North American electric-vehicle (EV) kingpin Tesla (TSLA +1.16%). Amazon and Alphabet enacted 20-for-1 respective stock splits, while Tesla completed a 3-for-1 forward split.
Most high-profile stock-split stocks have crushed it in the return department over the trailing decade. AMZN data by YCharts.
What these companies share is easily identifiable competitive advantages that have helped them outperform over long periods.
- Amazon accounted for nearly 38% of estimated online retail sales in the U.S. in 2023. But more importantly, it's the parent of Amazon Web Services (AWS), the leading global cloud infrastructure service platform. Even though AWS accounted for "only" a sixth of Amazon's net sales last year, it generated two-thirds of the company's operating income.
- Alphabet's Google gobbled up an impressive 91% of worldwide internet search share in March, and hasn't gone a month without securing at least a 90% share of global internet search in nine years. It's also the parent of YouTube, the second most-visited social site on the planet.
- Tesla is the first automaker to have successfully built itself from the ground up to mass production in well over a half-century. It produced almost 1.85 million EVs last year and is the only pure-play EV maker that's generating a recurring profit.
In other words, it's not hard to see why everyday investors and lawmakers alike have flocked to stock-split stocks.
Image source: Getty Images.
Congress' most active stock trader is buying shares of this magnificent stock-split stock
Thanks to the STOCK Act, which requires lawmakers to report their trading activity of $1,000 or more within 45 days, retail investors can keep tabs on what our elected officials are buying and selling. Based on periodic transaction reports, we've learned that Congress' most active trader, House Rep. Ro Khanna (D-Calif.), has been buying shares of the most-prominent stock-split stock of 2024: retail giant Walmart (WMT 0.41%).
Khanna is a busy representative from a stock trading standpoint. In 2023, he made 4,253 trades, based on data from Capitol Trades. For context, this is over twice as many trades as the second most active stock trader in Washington, D.C., Rep. Michael McCaul (R-Texas), who completed 1,826 trades last year.
According to filings, Khanna acquired between $50,000 and $100,000 worth of Walmart common stock on Oct. 31, 2023, another $15,000 to $50,000 in shares on Jan. 10, 2024, and between $15,000 and $50,000 in shares on Feb. 13, 2024.
What's particularly noteworthy about Khanna's final purchase is it came after Walmart had announced its plans to conduct a 3-for-1 forward split.
Doug McMillon, the president and CEO of Walmart, noted in his company's press release announcing the split that:
Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates. Given our growth and our plans for the future, we felt it was a good time to split the stock and encourage our associates to participate in the years to come.
Walmart completed its 3-for-1 split prior to start of trading on February 26.
NASDAQ: WMT
Key Data Points
Stock-split stock Walmart offers clear competitive advantages, but its shares are now pricey
Aside from generating plenty of buzz from its stock split, Walmart has historically used its size as its biggest competitive edge.
Although size doesn't always matter in the business world, having deep pockets can come in particularly handy for retailers. Being able to buy products in large quantities helps Walmart reduce its per-unit costs and, ultimately, lowers the sales price of those items. The company's draw with consumers has long been its ability to undercut traditional grocery stores and local mom-and-pop shops on price.
Walmart's stores aren't tiny, either. The company purchases groceries and products for the home that draw in all types of consumers. Its expansive product offerings drive home the idea that it can be a one-stop shopping destination for consumers.
Walmart is also benefiting from its aggressive investments in technology. This includes everything from improving the online ordering process for its customers to smoothing out the kinks in its supply chain to ensure that its stores have the right merchandise.
WMT PE Ratio (Forward) data by YCharts.
Over the long run, Walmart has proven it's a phenomenal business. But as things stand right now, Walmart's stock is, arguably, pricey.
Although stock-split stocks typically command a valuation premium because of their undeniable competitive advantages, a forward price-to-earnings ratio of 25 may be the upper bound for a company not outpacing the rate of inflation by much in the growth department.
For example, excluding currency movements, Walmart registered sales growth of 4.9% in fiscal 2024 (ended Jan. 31, 2024). Wall Street analysts are forecasting sales growth of roughly 4% in fiscal 2025 and fiscal 2026. All three of these figures aren't much higher than the prevailing rate of inflation in the U.S. In other words, there's not much in the way of true organic growth from Walmart, even with its e-commerce sales booming.
While patient investors in Walmart should do just fine, active traders, like House Rep. Ro Khanna, may end up disappointed.
