Can Stock Splits Drive The S&P 500 Above 4,000?
If you asked me that question two months ago, I would have laughed. Stock splits don’t change anything about a company. In theory a stock split does make a stock more accessible, because the lower price after the split, can allow smaller investors to buy it, when they might not have been able to otherwise.
That benefit of a stock split is far less important now with the ability to trade a single stock or even fractional shares on many stock trading platforms (unlike the more traditional 100 lot order). Further reducing that traditional benefit is that many investors participate through ETFs, making the price of any individual stock less of a factor in restricting broad ownership.
In theory, stock splits shouldn’t do much, but there is some evidence that recent splits by Apple AAPL and Tesla TSLA have had a large impact on their valuation.
There are many explanations for why Tesla and Apple have outperformed. Both announced market beating earnings calls and potentially positive shifts in their business mix. Tesla could be included in the S&P 500 which would force extremely large buying interest from investors tracking the S&P 500.
While there are many valid reasons, it is difficult to stare at this chart and not ask the question – did announcing splits have a disproportionately large impact on share price? Of the FANGMAT stocks I’ve chose, they are up the most since the middle of July. For both stocks, there is an obvious surge in price since the day they announced the split (there was other news out on those days for both companies, so it might be coincidental).
While NVIDIA NVDA came close to the returns of Apple and Tesla (24% versus 29% and 30% for the time period), neither Microsoft MSFT nor Alphabet came close to keeping pace (3% and 4% returns over the period).
There are lots of moving parts in this market, but I cannot help but wonder if the share split played a significant roll? Judging by the enthusiasm the splits generated in my social media streams, it seems that investors are excited by the potential for the split and may have invested heavily based on that.
On Monday morning, but stocks will trade reflecting the split. My intuition tells me that we will experience a “sell the news” type of event. Where many investors who positioned themselves for a tidal wave of new buyers, will be disappointed.
If that selling doesn’t occur, it would seem to confirm that either the price gains since the split announcements were a coincidence and any correlation is spurious, or that it is a meaningful event to split a stock from a valuation standpoint. Under either of those scenarios I expect we will see a lot more stock splits, because the cost to split is small relative to the potential gains that are apparently there.
2020 continues to deliver unexpected market behavior and this one is puzzling to me, but unlike much that has occurred in 2020, we should have a definitive answer on what was going on by the end of the week! (it would be nice to get some clarity from Standard and Poors on any S&P 500 inclusion plans).