In contrast to reverse splits, a stock split is representative of a healthy company with better days ahead -- more often than not. However, one of the glaring misconceptions of beginning investors is that a stock split is in itself a positive event, when the reality is that the actual split doesn't mean much of anything.
With the fourth season of HBO's The Sopranos out on DVD last week, now seems like a reasonable occasion to have this discussion, because the "stock split means money" theme recurs throughout the series.
In the first season of the show, for example, Carmela Soprano -- the mob boss' wife -- goes behind her husband's back and puts cash in American Biotics (Ticker: SCAM), maker of a side-effect free, anti-impotence drug. But her elation occurs not with any rise in the stock's value, but when she picks up the newspaper and reads that the stock splits 3-for-1:
"Investors who had predicted the split earlier this year were well rewarded," the paper said.
By season four, Carmela is trying to convince Tony (her mob boss husband) to put cash in a "hot stock tip" from her cousin. After having some luck with horse racing, Tony finally relents:
Tony: "I came into some cash. It's OK. Let's buy that stock."
Carmela: "It split. It's too late -- we missed it!!"
No, Carm. A stock split doesn't mean that it's too late -- or much else for that matter. Need evidence?
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Coke (NYSE:KO) is up 2,695% since its seventh split on June 16, 1986, and is up 21% since its 10th and most recent split on May 10, 1996.
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Time Warner (NYSE:TWX) shares are up 2,731% since AOL first split on November 23, 1994. TWX is up 88% since AOL's fourth split in March 1998, but down 19%, 65%, and 81% since its fifth (11/17/98), sixth (2/22/99), and seventh (11/22/99) splits.
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Microsoft (NASDAQ:MSFT) is up 6,435% since it first split on September 18, 1987. MSFT is down 41% from its eighth split (3/26/99), but up 9% from its ninth split (2/14/03).
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eBay (NASDAQ:EBAY) is up 91% since it first split on March 2, 1999. It is up 85% since its second split (5/25/00), and 1% since its third and latest split (8/29/03).
- Berkshire Hathaway (NYSE:BRK.A) has never split. BRK.A is up 1,032% since Microsoft's second split on April 12, 1990. It is also up 31% since AOL shares last split on November 22, 1999.
So we have stocks rising after splits, and stocks falling after splits. We also have Microsoft splitting after falling, eBay splitting twice at nearly the same price, and Berkshire Hathaway rising without splitting. Do you get the impression that in and of itself, a stock split doesn't really mean much of anything?
Jeff Hwang owns shares of eBay and Berkshire Hathaway, and can be reached at [email protected].
