Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap
- To increase liquidity
- To meet stock-exchange listing requirements
- To express a bullish management sentiment
Regardless of the reason, though, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
That's why we pair up stock-split announcements with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think a company's long-term potential is outstanding, and the company is giving off bullish signals, maybe then investors should take notice.
Here are two stocks that recently announced their intention to split their shares.
|
Stock |
CAPS Rating (out of 5) |
Split Ratio |
Pay Date |
Current Share Price |
|---|---|---|---|---|
| Copart (Nasdaq: CPRT) | **** | 2:1 | March 28, 2012 | $52.94 |
| Valhi (NYSE: VHI) | * | 3:1 | May 10, 2012 | $56.28 |
Source: Online Investor.
Don't blindly buy into a split -- you still need to do some research. Use the announcement as a jumping-off point to determine whether its shares are two or three times as good as before.
Going once, going twice
Like an eBay for salvaged cars, auto auctioneer Copart has been busy bidding up the value of its shares, turning in robust sales and profit growth this past quarter. Typically it works in the insurance market, auctioning off recovered stolen and totaled cars, and it saw volumes grow by 6% there. However, it's increasingly growing in the non-insurance market, and volumes in that segment jumped more than 8% and now represent 20% of the total North American volume. The stock is up 30% over the past year and is 15% higher in the last month alone.
The used-car market is proving just as resilient as the overall auto industry, with shares of KAR Auction Services also up strongly and the National Auto Auction Association saying the fourth quarter was the industry's best of 2011 even with volumes down 3%. In the used-car market, volumes surged 9%, but Motley Fool blogger Christopher French thinks dealership networks like AutoNation, CarMax, and Sonic Automotive (NYSE: SAH) will have varied degrees of success: "The long-term value creation potential of the domestic automotive dealership industry is weak compared to other more dynamic and growing industries due to its intense competition, low returns on invested capital, and low cash flow generation per dollar of revenue."
Copart is looking to obtain wider distribution and greater liquidity for its stock, which is the reason behind its split announcement. With plans to possibly enter emerging markets as well -- perhaps as soon as early as this year (but definitely next year) -- the auctioneer is really expanding its business.
I've marked Copart to outperform the broad indexes on the Copart CAPS page, but add the auto salvage specialist to your watchlist to see if it can succeed in these foreign markets as it has domestically.
How dry I am
Maybe Valhi chairman Harold Simmons is trying to suggest its three-for-one stock split means better times are coming. Valhi just reported fourth-quarter sales, and unlike Copart, it suffered from weaker sales of chemicals and component products.
Valhi is a conglomerate of operations, having interests in titanium dioxide through its Kronos Worldwide (NYSE: KRO) subsidiary, and various components, such as locksets, exhaust pipes, and parts and accessories through NL Industries. It also has its hand in titanium melted and milled products through its stake in Titanium Metals (NYSE: TIE), while also operating waste management services itself. Where the TiO2 division enjoyed pricing that increased 46% overall in the fourth quarter, greatly offsetting a decline in volumes, consolidated profits plummeted at the components maker, falling to $19.9 million from $56.9 million last year.
TIMET fared a little better and saw increased sales and volumes, but costs ran slightly ahead of revenue growth. The waste management business saw sales decline in the fourth quarter.
There are a lot of moving parts to consider when investing in Valhi, and Simmons has been buying up large tranches of stock of all its companies. But CAPS member DrRonPaul4Prez doesn't see them all adding up to increased value for investors and thinks Valhi will continue to underperform the markets going forward. That could be why only 64% of the CAPS members rating Valhi are bullish on the stock.
Add the conglomerate to the Fool's free portfolio tracker to see whether creating more shares for its chairman to purchase is the right move to make.
Split the difference
Head over to the completely free CAPS service and let us hear what you've got to say about these or any other stocks that you think we should split hairs over. It's free and full of information you can use today.
