Pamela, here is an excellent explaination of splits that I found on another thread in which I hold stock in.
To: SOBANO TIEM ( 2101 )
From: David Luckie
Sep 14 1996 2:13PM EST
Reply #2102 of 2104
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. |
