The Rare Trend Investors Should Cheer

Matthew Carr | Chief Trends Strategist | The Oxford Club

During the long months of quarantine, one of two things happened: You either added or subtracted inches from your waistline.

This common experience triggered a fitness boom, which in turn drove shares of Nautilus (NYSE: NLS) and Peloton (Nasdaq: PTON) higher. It was a very profitable trend that we covered here.

But individuals weren't the only ones looking to shed some numbers. We saw this from companies too. And this trend is really starting to gain steam...

The Market's Hottest Weight Loss Program

In July 2020, Apple (Nasdaq: AAPL) announced a 4-for-1 stock split.

A month later, Tesla (Nasdaq: TSLA) announced a 5-for-1 stock split.

It's a weight loss program that has become increasingly popular.

And this past May, Nvidia (Nasdaq: NVDA) and Trade Desk (Nasdaq: TTD) announced that they would split shares in the months ahead.

In June, CSX Corp. (Nasdaq: CSX) and CoStar Group (Nasdaq: CSGP) followed suit.

These splits have become big news.

And what that really shows is how rare stock splits have become.

Back in the 1980s, there were 44 splits per year on average. During the dot-com boom from 1998 to 2000, this rocketed to an average of 91 stock splits per year.

In 1997, 102 S&P 500 Index companies conducted splits.

But in 2019, the number of such companies had fallen to a mere four.

Now, there are a few reasons stock splits have approached extinction.

One is that the market has been controlled by institutional investors, not retail investors. This is why we've seen the rise of Reddit crowds looking to upend Wall Street's apple cart.

I've long argued that as the market becomes more volatile, higher share prices create stability. It keeps the day traders at bay.

And there is another case made by some: Companies maintain high share prices because they're unsure about the future.

I don't totally buy into this one. I would counter that the cause would more likely be elitism. I don't think Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) Class A shares trade for more than $420,000 because he's not confident about the future. I think insanely expensive shares that are available to only the most elite provide CEOs with sparkly crowns to wear.

But whatever the causes, the result is quite clear. There are currently 279 companies on the S&P 500 with share prices above $100. That's more than half of the index. And there are 48 with prices topping $400. Not to mention the S&P 500 boasts eight components with quadruple-digit share prices - plus Intuitive Surgical (Nasdaq: ISRG), which is trading at more than $990.

All of this translates to very expensive stocks. The average share price of an S&P 500 stock now stands at $201.80. That's up 452.4% from the $36.53 average price in 2003.

Talk about a bloated waistline!

The Discounted Surge

Here's the most important piece of this: Stock splits often deliver outperformance.

Nvidia announced its 4-for-1 stock split on May 24.

Its shares are up more than 30% since then.

And if we go back to the companies behind the two big-name splits of 2020 - Apple and Tesla - we can see both have run higher.

As we approach the first anniversary of those splits this month, Tesla shares are crushing the market and Apple's are lagging the S&P 500.

But history tends to side with Tesla's post-split performance, not Apple's.

In two separate studies by David Ikenberry of 1,000 stocks that underwent a 2-for-1, 3-for-1 or 4-for-1 split, shares outperformed the market by 8% in the year following the split. And over the longer term, they did even better, outperforming the market by 12% over the three years following the split.

Part of the reason for this is that those expensive shares - which many investors want to own - become more affordable. When a company cuts its share price in half - or by more - it furthers the momentum that led to the share price hitting such high levels in the first place.

For years, stock splits neared extinction. They were almost as rare as unicorns. But as everyone looks to shed unwanted numbers, stock splits are on the rise - though still nowhere near the levels we saw decades ago. And they may never hit those levels ever again.

But these rare occurrences are something investors should cheer, not shy away from.

Here's to high returns,

Matthew

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2021/08/02