Careful What You Wish For, Stock Split Edition

Investors usually consider a stock split to be a positive.  The rationale is that is makes the shares more affordable to ordinary investors.  We have asserted that this is a somewhat outdated view in an era when traders no longer distinguish between round lots and odd lots and fractional shares are widely available[i].  Stock splits are the market’s equivalent of making change.  You may prefer having 20 $1 bills instead of one $20 bill, but either way the amount of money in your wallet is unchanged.

With Shopify (SHOP on TSX and NASDAQ) trading ex-split today (10:1), it seemed like an opportune time to see if stock splits have indeed helped the prices of popular stocks that have announced splits recently.  It certainly hasn’t benefitted SHOP, which is obvious when we look at a normalized chart of that stock versus Canada’s benchmark S&P TSX 60 Index:

Normalized Daily Graph, SHOP (blue/white) vs. SPTSX60 (magenta), April 11, 2022 to June 29, 2022

Source: Bloomberg

Since the date that SHOP announced its intention to split 10:1, it has lost nearly half its value while SPTSX60 has lost about 13%.  That underperformance is striking.  Unfortunately, SHOP has been mired in a monstrous drawdown, with this morning’s decline pushing it down about 80% from its all-time high in November.   I thought it unfair to draw a conclusion from one miserable performer, so I examined other well-known companies’ performances since they announced splits this year.  Three of them are among the top US companies: Amazon (AMZN), Alphabet (GOOG, GOOGL) and Tesla (TSLA).  Let’s see how they fared.

Of the three, AMZN is the only one to have begun trading ex-split.  Since announcing its intention to split on March 9^th, it has significantly underperformed both the S&P 500 (SPX) and NASDAQ 100 (NDX) benchmark indices:

Normalized Daily Graph, AMZN (blue/white) vs. SPX (green), NDX (magenta), March 9th, 2022 to June 29, 2022

Source: Bloomberg

We see AMZN down nearly 22% vs. about 11% and 15% for SPX and NDX respectively.  To be fair, that period includes an overwhelmingly negative response to the company’s first quarter earnings announcement.  Yet if we look at the brief period since they traded ex-split earlier this month, the underperformance remains:

Normalized Daily Graph, AMZN (blue/white) vs. SPX (green), NDX (magenta), June 6th, 2022 to June 29, 2022

Source: Bloomberg

In the course of less than a month, AMZN is down about 12.5% vs. 7.5% declines from the US benchmarks. 

Alphabet kicked off the run of megacap split announcements in January.  Since announcing its 20:1 split (which goes ex- on July 18^th), GOOG has roughly kept pace with SPX and outperformed NDX:

Normalized Daily Graph, GOOG (blue/white) vs. SPX (green), NDX (magenta), January 27th, 2022 to June 29, 2022

Source: Bloomberg

It is quite reasonable to expect a key index component to roughly match its benchmarks, but we don’t seen evidence that the split meaningfully boosted GOOG’s performance since its intention to split was announced.

The most recent example was TSLA, which announced its intention on June 10^th to split 3:1 at a date to be disclosed.  Like GOOG, TSLA has kept pace with key benchmarks, underperforming them only slightly in the short time since the split announcement:

Normalized Daily Graph, TSLA (blue/white) vs. SPX (green), NDX (magenta), June 10th, 2022 to June 29, 2022

Source: Bloomberg

Given the miniscule sample size of the examples above, we can’t conclusively state that stock splits do little or nothing to help a company’s stock price.  That said, we certainly don’t see evidence that splits are meaningfully helpful either.  My best explanation for enthusiasm around splits is they are a bull market phenomenon.  Companies tend to split only after a period of rising prices.  Those tend to happen during bull markets, when investors are continually seeking positive validation for their enthusiasm.  Stock splits fit that theme.  During a bear market, investors are already wary.  Stock splits may be more like a sugar rush for investors – something that brings pleasure in the short term but with little long term nutritional value.

—

[i]  We noted that options – which still normally trade in round-lots of 100 – may be more affordable, but we are beyond the 2021 phenomenon of call options buyers pushing stocks higher on their own.