Some quarterly reports will make your head spin.
I was mid-Exorcist on hearing that AIG
The spinning was short-lived. I quickly realized that AIG had declared a humbling 1-for-20 reverse split recently, so a profit of $2.30 a share for the insurer today is actually $0.115 a share in June dollars.
However, seeing AIG's stock trade as high as $28 this morning now finds me clearing room in my "exception to the rule" mantelpiece. For now -- at least -- AIG has become one of the rare companies to subject shareholders to a reverse stock split and win.
Anatomy of a split
It wasn't pretty at first. AIG swapped out every 20 shares that closed at $1.16 at the end of June for a single share originally valued at $23.20. The first few trading days after the zero-sum move proved disastrous.
Date |
Close |
---|---|
6/30/09 |
$23.20 |
7/1/09 |
18.08 |
7/2/09 |
18.25 |
7/6/09 |
16.19 |
7/7/09 |
13.75 |
7/8/09 |
13.10 |
7/9/09 |
9.48 |
How do you like the reverse split now, shareholders?
Not every reverse split has to have an unhappy ending. The reason the practice gets a bad rap is that it usually involves desperate companies that have fallen into the penny stock muck that resort to reverse splits. The reverse isn't the reason why the share prices continue to deteriorate. Blame inertia.
A lousy stock pre-split is going to be a lousy stock post-split. Fearing a reverse -- which in theory reestablishes a stock's price into buyer-conducive territory -- is like fearing your nudity. A share price is only as ugly as the stock buried beneath the clothing.
Don't shoot the message. Shoot the messenger.
Pedaling backwards
Now that the exchanges are once again threatening to delist stocks that consistently close below the price of $1 a share, expect more companies turning to reverse splits in the future.
"If in fact Sirius XM stock does not trade above $1, we would have to take actions which would mean a reverse split within the next year," Sirius XM Radio
This is the kind of talk that typically spooks investors, but why so tense? What is the difference between 4 billion shares at $0.50 and 400 million shares at $5 or 40 million shares at $50? The multiplication exercises result in the same market cap at the end. The only difference is that you swap out a few speculators, and replace them with investors.
Blockbuster
But it's not the end of the world. It's just the end of a share price.
Turning the hall of shame into the hall of fame
AIG isn't the only stock to go through a reverse split, only to trade higher. Coeur d'Alene Mines
If you're still all curled up like a Cheez Doodle, frightened to find one of your stocks going through a reverse stock split, be reasonable. At the very least, be honest. If you're afraid of what the market will dictate that your stock is worth -- sans penny stock speculators -- maybe you're holding the wrong stock.
A 1-for-4 reverse split didn't get in the way of a juicy buyout bid for Sun Microsystems
The more recent success stories of Coeur d'Alene and AIG will help break down the stigma.
You have nothing to fear but a fearful company itself.
Other reverse handoffs:
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