Stock splits have an interesting narrative. During bull markets, investors can't get enough of stock-split stocks as prices rise in anticipation for upcoming splits. This conflicts with the actual reality on the ground.
In actuality, stock splits have no impact on a company's financial performance. After a forward stock split (where a company's shares outstanding grow) or a reverse stock split (where shares outstanding contract), a company's total shares outstanding will change, but it is still the same old business as the day before.
This doesn't stop investors from getting enamored with stock-split stocks during a bull market, though.
Now, with the market in a correction, investors have fallen out of love with stock-split stocks. Does that make them a potential buying opportunity for your portfolio? Here is one stock-split stock to buy and one to avoid in the month of March.
Chipotle: Trading at its cheapest valuation in years
Chipotle (CMG 0.17%) split its stock 50-to-1 in 2024, bringing its share price down to a more manageable buying price for individual investors. As of this writing, its stock trades at a price of $50 and is in a 27% drawdown. Investors are concerned about a slowdown in restaurant spending at the moment, which is causing the sector to struggle to start 2025.
NYSE: CMG
Key Data Points
The underlying business looks just fine. In 2024, Chipotle's revenue grew 14.6% to $11.6 billion. This was driven by opening new restaurants and increasing same-store sales of 7.3% compared to 2023. Operating margin was 16.9% in the year, up from 15.8% in 2023.
Add everything together, and Chipotle's earnings per share (EPS) grew 24.7% year-over-year in 2024.
With plenty of room to grow its store count in North America -- and eventually globally -- I believe Chipotle can keep up this strong EPS growth for years to come.
After the stock's drawdown, Chipotle trades at a price-to-earnings ratio (P/E) of 45. While this doesn't look dirt cheap, it should come down quickly with how fast Chipotle is growing its EPS and is at its lowest level in the last five years, excluding the March 2020 stock market panic.
Investors who buy Chipotle stock today should do just fine holding over the long haul.
Sirius XM's losing business model
Forward stock splits are a sign a company's business is succeeding. The price of your stock rises generally when the business does well. Reverse stock splits mean the opposite, which is why Sirius XM Holdings (SIRI 1.08%) recently implemented a reverse split. A leader in satellite radio, Sirius XM is struggling to pivot its business to modern digital audio streaming.
In 2024, revenue fell 4% to $6.6 billion. Free cash flow of around $1 billion is at its lowest level in 10 years. Its acquisition of Pandora Music has gone nowhere, and it is investing in expensive podcast licensing deals.
Despite prior years of success, Sirius XM is getting lapped by modern competitors like Spotify and YouTube, which are gaining millions of new users every year. Sirius XM's ranks of users are moving in the wrong direction.
Dangerously, Sirius XM carries more than $10 billion of long-term debt on its balance sheet. If its free cash flow keeps moving in the wrong direction, this company could be headed for more trouble in the next few years, even with the stock already down 71% from all-time highs. Avoid buying Sirius XM stock for your portfolio in March.
