Q: How do you invest in stock splits?
A: You don't.
A funny thing happened yesterday. Shares of super high-flying stun-gun maker Taser International
Foolish investors know that a stock split isn't an economic event. Splitting a stock is merely trading a dime for two nickels. Your share of the Taser pie isn't any bigger or worth any more than it was before the split; it's just in a different denomination. In other words, no value was created.
Try telling that to the market for Taser shares. Those same shares climbed 13% when the 3-for-1 split was announced last month. So now 33% of Taser's rise has come on news that has absolutely zero effect on the underlying value of Taser the company.
This isn't to say that Taser's shares are ridiculously overvalued (my colleague Don Crotty addresses this question). Personally, I find the company intriguing. Taser did, after all, shock short sellers with a stellar earnings report. But given what we know about stock splits, yesterday's rise should make investors scratch their heads.
Back in November, we discussed how a common investor mistake played out on HBO's The Sopranos. In the episode, Carmela Soprano picked up the newspaper to learn that "Investors who had predicted the [3-for-1] split earlier this year were well rewarded."
Of course, we know this doesn't make sense.
Granted, in contrast to reverse splits, a stock split is more representative of a healthy company. But we've studied the post stock-split price movements of Coke
Most likely, institutional buyers and shorts still looking to cover took advantage of the added liquidity of Taser's tripled share count yesterday, driving up prices. Value-oriented investors might do well to consider taking this opportunity to sell, either to them or to Carmela Soprano.
Have your own shocking thoughts about Taser? Share them on the Taser discussion board.
Fool contributor Jeff Hwang owns shares of eBay and Berkshire Hathaway, and can be reached via email.