A stock split is usually a nonevent. Sure, it is typically interpreted as a bullish indicator. A company wouldn't be looking to multiply its shares at a lower price point if it felt that near-term fundamentals would drag the stock even lower.
However, too many neophyte investors confuse stock splits with free lunches -- unaware that in Wall Street there are no free eats. Cash dividends are accompanied by share prices dropping by the amount of the payout. The same thing goes for stock splits.
Last night's 3-for-2 stock split announcement by California Pizza Kitchen
Let's say that you and I walk into the local CPK and order up a pair of pizzas. I'm partial to the flagship barbecue chicken pie, but let's say that you are intrigued by having mayo on a pizza and go for a BLT. (Seriously. It's on the menu.) We're in a hurry, so we order it as takeout at the bar. Along the way, a hungry friend shows up. Let's call him Anders Bylund.
Good guy. Loves pizza. Anders is a huge fan of both chicken and lettuce-topped pizzas. We aren't that hungry so we offer to cut him in on our pizzas. We tell the cashier to give us three boxes instead of two, placing a third of each of the two original pizzas in the third box.
That, my Foolish friends, is a 3-for-2 stock split. We're walking out with the same amount of pizza. We paid for two pizzas and that's just what we have, now evenly divided in three pizza boxes.
Sure, this would be a cleaner story if it was the more conventional 2-for-1 stock split, but as CPK's BLT pizza shows us, sometimes you get a little mayo in your lettuce.
Now that stocks are appreciating and hitting new highs, you can expect more stock splits in the future. Some companies like Google
So hopefully you've learned your lesson. There is no free lunch (meaning that Anders did chip in for his quasi-pie). Lesson learned? Cool. Now split.
Buffalo Wild Wings is a Hidden Gems stock pick. Berkshire Hathaway is an Inside Value recommendation. If you want to know why, dig into a 30-day trial subscription for free. Yes, you can hold the mayo.
Longtime Fool contributor Rick Munarriz has been to the new CPK that opened near his home in Coral Gables, Fla., three times since it opened two months ago. Yes, he's had the BLT pizza. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.