This ‘divide and conquer’ investing strategy can lead you to stock-market winners
Every time a company announces a stock split, fastidious analysts point out that splits make absolutely no difference since key metrics like earnings get split along with the shares. Same pizza, more slices.
But these nitpickers miss the big picture. Splits matter — because these stocks outperform after the announcement, by a lot. Average returns one year later are 25% vs. 12% for the S&P 500 as a whole, say researchers at Bank of America.
It’s worth brushing up on stock splits now, for two reasons. Stock splits are picking up again after a decade-long lull. There were 17 last year, the most since 2013. These included Nvidia, Broadcom, Walmart and Chipotle. Stock-split outperformance has picked up, too, says Bank of America. On average, the shares of stocks that split in 2024 advanced 17% after six months.
What explains this “divide and conquer” effect? Portfolio managers and strategists offer these reasons.
1. Splits make stock more attractive to the retail investor: A longstanding theory is that lowering the price of a stock makes it more attractive and easier to buy for people with small accounts. “It has to come from some type of flows, probably from retail,” says David Wagner, a portfolio manager at Aptus Capital Advisors.
This may matter less now that many brokerage accounts offer fractional shares. But the theory still holds up, says John Buckingham, editor of the Prudent Speculator stock newsletter. “We know the market is ruled by emotion,” he says. “So, any time you can feed the beast positive news and provide enthusiasm to an investing audience, stocks can appreciate. Stock splits give investors a warm and fuzzy feeling.”
There’s also a practical angle. A stock split increases the odds a company could be included in the Dow Jones Industrial Average, notes Jay Woods, the chief global strategist at Freedom Capital Markets. This can boost performance. The Dow is a price-weighted index, so companies with stratospheric stock prices will never qualify, since they’d influence the index too much. Split the stock, and there’s a better chance. For example, Apple, Amazon.com and Nvidia all joined the Dow after splitting their stocks.
To read the complete article, please visit MarketWatch: Stock splits tend to boost a company’s shares. Here’s how to find candidates.
