DOING THE SPLITS?
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it makes sense. They've got to reproduce somehow.
But the case for stocks splitting is a little less obvious. They're not creating any life, or value for that matter. One hundred shares at $100 are worth the same as 200 shares at $50.
Still, the phenomenon of the stock-split-announcement boost is in full bloom. In the first month of 1999, 46 companies have announced splits and 31 have gone up since. And the effects are immediate: Stocks rise on the news, not necessarily on the event.
There's no shortage of examples: On Thursday, Intel jumped more than 3% as investors anticipated the announcement of the company's 12th stock split. And Exodus Communications, a company that hosts Internet sites such as SmartMoney.com, soared more than 30% thanks to a fourth-quarter-earnings loss of $1 per share, in line with expectations, and a concurrent split announcement.
Tech bellwethers Microsoft, Sun Microsystems and IBM have all basked in the post-split-news glow during the past week. Even nontech giant McDonald's rose 4% on Tuesday after the company unveiled in-line fourth-quarter earnings along with a 2-for-1 split.
And then there's the case of online auctioneer eBay. On Tuesday after the close, the company reported fourth-quarter earnings well ahead of analysts' estimates. There was certainly cause for investor enthusiasm. There probably was not cause for the 82 points worth of enthusiasm that followed on Wednesday, though. Chalk up the difference to a 3-for-1 stock split announcement.
Even on the Street, where models matter and stocks are supposed to behave in a reasonably rational fashion, it's impossible to ignore the impact of splits. "I do think a significant portion of [Wednesday's] rise can be attributed to the split," says Sara Zeilstra, who covers eBay for Warburg Dillon Read. "I don't know that I could give an absolute percentage, but it's pretty clear that when companies announce splits, it's viewed as extremely favorable in the marketplace."
The tendency to rise on split news is even more pronounced on the new frontier of Internet stocks. For some crazed investors, any news is good news. But Zeilstra thinks there are long-term benefits as well. Newly minted Internet stocks often trade with very small floats. (A stock's float is equal to the number of shares outstanding minus the shares held by company insiders.) By increasing the number of shares on the marketplace, companies create more opportunities for ownership and feed the demand for their stocks. Splits might also allow insiders to unload shares in smaller chunks, Zeilstra says, simultaneously bolstering the float and lessening the stock's volatility. That's not the best news for traders, but it should be reassuring for long-term players.
We wouldn't recommend buying stocks solely on the hunch that they are poised for a split. But companies on the verge of splitting are usually in pretty good shape to begin with; otherwise, there would be little need to bring the price down through share multiplication.
In today's SmartMoney Stock-Split Screen, we began by identifying stocks with fairly high price tags that have some momentum behind them. Then we filtered out the companies that have already announced splits during the last 12 months, along with those on the verge of being acquired. In selecting the most likely candidates, we also eliminated those companies that are operating in traditionally cyclical industries whose ups and downs make splitting a dangerous proposition. It's not rocket science, but you don't have to be a rocket scientist to make money on one-day 80-point gains.
The Internet Plays
When we introduced this screen in July, we suspected that the broadband Internet specialist At Home might be ready to make like a banana in an ice cream shop. Shares were up more than 200% since the July 1997 IPO and other Internet plays were profiting handsomely from split announcements. The At Home board resisted and the stock has done fine without the psychological boost. At 119, the stock trades at a nearly 300% premium to its September lows.
And investors didn't balk at the company's recent decision to shell out $6.7 billion for the Internet portal Excite. The deal represented a nearly 100% premium to Excite's stock price prior to the announcement, but At Home's ambitious plans to challenge America Online with its high-speed Internet conduit kept investors in the game.
The current trend is to announce splits alongside earnings, and At Home just reported results last week. But given the stock's ascension and individual investors' thirst for Web plays, a split seems reasonable. A company spokesman declined to comment.
Keep an eye out for Internet hot shots Rambus, C|Net and Doubleclick as well. All three met our screen criteria.
If Coors' stock gets any hotter, company insiders might even be able to buy some good beer; shares are up almost 100% over the last 12 months. Coors has never split (two six ounce cans?), but its stock hasn't performed this well since the mid-80s.
The company's head of investor relations, David Dunnewald, admits that the subject comes up in company discussions, but he says there's no urgency to split. "We've looked at it periodically for the last two years, and who knows whether that's something we want to do," he says.
Dunnewald says that, as far as he can tell, investors aren't clamoring for cheaper Coors share prices. He does note, however, that the stock's average volume over the past few months has been lower than it was during the summer. He suspects that added liquidity might smooth the stock's swings over the long term.
Investors looking for signs of strength at Coors should be buoyed by the board's recent extension of a share repurchase program. After buying back more than $25 million worth of stock in 1998, the company has clearance to buy $40 million more in 1999.
Immunex wouldn't comment on the possibility of a stock split, but it certainly seems like the time is right. The company is due to report fourth-quarter earnings in early February, and its stock has nearly tripled since the summer. Earlier this month, CEO Ed Fritzky told investors that sales of the company's rheumatoid arthritis drug Enbrel will exceed analysts' sales estimates of $11 million.
Wall Street isn't crazy about Immunex -- more than half of the analysts who track the stock rate it a Hold -- and its shares trade at a rather robust 190 times 1999 earnings estimates. But after years of losses, the company is expected to turn a profit of 76 cents per share in 1999. In 2000, earnings are projected to triple.
Storage concern EMC has split its shares once during the past three years. That was in November 1997 when the stock was trading at approximately 60. Fourteen months later, the stock has climbed back well above 60; last week, it cracked the 100 barrier.
On Tuesday the company topped analysts' fourth-quarter estimates of 46 cents by two pennies, thanks to a 36% jump in revenue. And research firm Dataquest reports that EMC continues to grab share from IBM in the large storage-system market.
Michael Gallant, EMC's investor relations manager, says the company is getting about 10 calls a day inquiring as to when the stock might split. "There is a significant increase in the interest," he says. "We get more and more calls every day."
Apparently, EMC investors understand the strange phenomenon: When their stock splits, they stand to make a little easy money.