It was the best of times for Starbucks
You're a smart investor. You know the drill. Stock splits are zero sum games. Starbucks will still be an $18 billion company whether it's 384 million shares at $46 or 768 million shares at $23. The same goes with reverse splits. LookSmart will still be a $100 million company whether it's 114 million shares at $0.82 or 16.3 million shares at $5.74 apiece.
Mathematically, splits mean little. However, the market's perception tells a different story. A stock splitting is seen as a winner. It's a company that has seen its stock appreciate in value and feels confident enough about its future to slash the price of its stock so it can start all over again. A reverse split is seen as a failure. It's the white flag being waved by a company that couldn't boost its share price organically, so it has to fake it to get out of the penny stock muck that it got itself into.
Stocks that split often go on to split again. Stocks that go for a reverse split? Well, history has not been as kind. Sure, you have companies such as InfoSpace
That's why I'm not entirely down on the downtrodden companies that turn to reverse splits as their last hopes. However, except for a few companies like Tucows
You also won't find me saying a bad word about Priceline.com
I'm almost willing to let LookSmart slide as well. It's not its fault that the stock cratered after Microsoft
However, for the rest of the penny stock pretenders out there, I have two words of advice when considering a reverse split: Earn it.
Longtime Fool contributor Rick Munarriz fancies banana splits over stock splits. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.