Sobano,
Reverse stock splits are almost never a good thing for the stock price, at least in the short term. To understand that, you need to understand what a forward stock split communicates to investors.
When a company does a forward split, it is sending the message that management feels the potential for growth in the company is very strong, and that the current multiple of earnings is low. However, the view is that the stock's price is too high for most investors to take advantage of, therefore adversely affecting the liquidity of the stock and the ability of the stock's price to move higher.
For example, consider Monsanto Co. (NYSE:MTC). In May, the company announced a 5-for-1 forward split, effective June 6. At the time of the split, the stock was trading at around $150 per share. Within a few weeks of the split, the stock had traded up to $34, an approximate gain of 11%. The stock traded off in the July correction, but at this point appears to be poised to retest those highs--which also happen to be all time highs for the stock.
When a company reverse splits, it is (perhaps unintentionally) sending the opposite message--that management feels the potential for further price erosion is high and that liquidity is too great.
For example, TLTK reverse split its stock on at least one occasion, and the result was significant erosion of the stock price, from the mid-20's all the way down to the sub-$1.00 prices of 1995. |
