I guess you know you're in a bear market when even household names are starting to discuss reverse stock splits.
Drugstore chain Rite Aid (NYSE:RAD) is the latest company to entertain the zero sum stock maneuver. With its stock having traded below $1 over the past 30 trading days, Rite Aid faces NYSE delisting if it can't get its stock back over the buck in six months. Ideally a company will drag itself out organically, but reverse splits are the easy way out, like fiscal cosmetic surgeons.
Stockholders will have to approve the plan for a reverse split, and then the company will decide on the appropriate ratio. If the stock hovers near the buck mark, Rite Aid may go for a conservative 1-for-10 split. If it heads lower, going with a 1-for-15 or 1-for-20 reverse will make more sense.
No one likes reverse splits. If an investor with 1000 shares of Rite Aid at $0.78 wakes up with just 100 shares at $7.80 after a 1-for-10 split, it doesn't change the fundamentals. One can argue that it's even a silly delisting rule on the Big Board. However, regional amusement park operator Six Flags (NYSE:SIX) also finds itself in the same boat, receiving a similar notice earlier this month. Terrestrial radio heavy Citadel Broadcasting (NYSE:CDL) got the note last month.
Few established companies have gone through reverse stock splits lately. Sun Microsystems (NASDAQ:JAVA) went through a 1-for-4 reverse split last year. Apparel e-tailer Bluefly (NASDAQ:BFLY) executed a more desperate 1-for-10 reverse this year.
Expect that number to climb. Companies like Six Flags, Rite Aid, and satellite radio titan Sirius XM Radio (NASDAQ:SIRI) that find themselves breaking the buck aren't approaching worthlessness. They typically have substantial debt on their books, so their enterprise values are substantially higher than their meager market caps. Reverse splits won't clean up the balance sheets. The cosmetic turn of a reverse split may enhance the perceived value of a company, but it's really a zero-sum game. The companies will eventually have to reward shareowners with real capital appreciation the old fashioned way: They will have to earn it.
Until then, with even more iconic companies threatening to belly flop into the sub-buck wading pool, get ready for the onslaught of reverse stock split announcements if the market doesn't turn around.
It may not be right, but in a few months it may be Rite Aid.
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