Would a Reverse Split Help These Stocks?

Companies get in trouble when their share price falls too low. Yet while reverse stock splits have the power to get companies out of trouble with listing regulations, they don't always work the magic necessary to resurrect a stock's profit-making potential.

A quick fix
When a stock lingers below the $1-per-share watermark for too long, the exchange advises the company to get its act together. Often, though, all it takes is a reverse split to push shares above $1 and make the stock suddenly worthy of inclusion again, even if the total market value of the company never changed. This possibility is always fresh in the minds of Sirius XM Radio (Nasdaq: SIRI) shareholders, as the stock has a seemingly chronic attraction to that troublesome dollar-per-share benchmark.

The widely held superstition that reverse splits always come undone as the stock wanders back toward the danger zone again may be going away, thanks to a spate of reverse splits for generally respectable companies that never were in real danger of delisting. In the case of Sirius, it just might be what the doctor ordered.

But then there are cases where a reverse split still wouldn't be enough. Take a look at these stocks, for example:

Source: Motley Fool CAPS and Google Finance.

All of these stocks have been under the magical $1 limit longer than allowed and are fighting delisting processes as we speak. But in a couple of cases, simply boosting the price per share might still fall short of Nasdaq requirements for continued listing. There's more to a stock listing than just keeping your nose above that particular water level.

A bridge over troubled waters?
You also have to meet one of four clearly defined combinations of positive income, positive cash flows, revenue, assets, shareholders' equity, and market capitalization. In the case of StemCells, the company can't meet any of these requirements mostly due to a string of unfortunate drug approval decisions by the Food and Drug Administration. A reverse split would most likely do no good here, though the company might meet the least stringent market cap limit of $160 million if a few key events go the right way.

Fellow drug developer Cell Therapeutics easily meets that $160 million cap requirement but falls short on total assets and stockholder equity for the most recent fiscal year. Short of landing the mother of all Hail Mary passes in an FDA appeal this fall, Cell Therapeutics may not recover even with a reverse split.

Delta Petroleum is a five-star CAPS stock despite its long history of failed listing tests. This time, we have lots of assets and plenty of shareholder equity on the books. It's also a turnaround story in the making, and it would be a shame for management to let the stock drop off the Nasdaq. This looks like a great spot to do a reverse split.

Like Delta, Citizens Republic and Evergreen Solar would be A-OK if only their share prices would rise back over that $1 threshold. Due to a vanishingly low equity balance, Capstone is not as lucky. The green energy revolution can't start fast enough for this company, because a simple reverse split isn't enough to get it out of trouble.

How do I know the difference?
Every situation is unique, and the exchanges have a history of leniency in these delisting processes. A reverse split may not always be the best way to hurry things along, but in many cases it wouldn't hurt much, either. The fees for filing a split -- forward or reverse -- runs in the thousands of dollars, not millions.

Regardless, it's a good reminder that just because a stock is cheap doesn't mean it can't get cheaper. Although some reverse splits will help catapult a stock out of danger, others will prove to be unsuccessful at anything but prolonging the inevitable.