ANALYSIS - Stock splits, the latest Wall St. fad
By Jennifer Westhoven
NEW YORK, Jan 29 (Reuters) - Frenzied trading in companies announcing stock splits has jeopardized
the long-held belief that stock splits lead to long-term gains, analysts say.
This week, some of the biggest names in Corporate America announced splits, among them International
Business Machines Corp. (IBM) , McDonalds Corp. , Microsoft Corp. , Intel Corp. , America Online Inc.
and Xerox Corp. .
But with so many "day" traders trying to make a quick buck on minute-to-minute stock moves, the
long-term positive effect of a split may have been accelerated into oblivion.
"I have fears that a lot of these are going to splatter some good citizens," said Bob Stovall, president of
New York- based Stovall/Twenty-First Advisers.
There have been many academic studies of stock splits with different conclusions depending on the year
and sample, but there is a consensus that split stocks tend to do well in the following year. Some studies
have pointed to gains that outperform the market by 3 to 8 percent.
Splitting shares does not create value. It is like getting two $10 bills for one $20 bill. A 2-for-1 stock split
doubles the number of shares outstanding and cuts the value of a stock in half.
So why do the stocks rise?
"Companies make these moves at times when they are positive about the outlook for their firms. It is a
way to send a positive signal," said Frederic "Rick" Escherich, a managing director at J.P. Morgan in
mergers and acquisitions, who has advised companies on splitting their stocks.
The message is the stock will be able to maintain its new, higher trading range and will not fall to new
lows after the split goes into effect.
Many firms, such as Internet services provider AOL, want to keep the interest of small investors who may
be scared off by high stock prices.
"Every time we hit a certain price point we set a split because we believe it's good to attract average
investors," said AOL chairman and chief executive Steve Case.
But the cherished belief that stock splits mean gains has attracted scores of momentum traders, causing
such volatility that analysts now wonder if the long-term gains are intact. No studies have been done
recently to measure the maelstrom.
"It's like short-term electric shock therapy," said Merrill Lynch analyst Steve Kim.
IBM is one example of the lightning swings. Its shares were punished last Friday after it posted earnings
but did not split its stock, as Wall Street had speculated. Shares slipped more than $17 that day. But
Monday, IBM erased additional losses of more than $6 as a rumor hit the Street that it would split its
stock Tuesday. The stock closed flat. On Tuesday, Big Blue announced the longed-for stock split and
shares rose $4.50. But the following day, Wednesday, they fell $7.13 a share.
"The high profile stock split announcements have been extremely successful, so a lot more individuals
have gotten into it," said Prem Jain, a professor at the Freeman School of Business at Tulane in New
Orleans, La.
One stock split service, Right Line, forecasts which companies will split their stocks and has a beeper
service to alert its clients every time a stock splits. Its Internet site (http://www.rightline.net), tells clients
to play a split by going long on a stock immediately after a stock-split announcement, going short as
soon as volume dries up and going long again just before the stock split becomes effective.
"Going long" means betting a stock will rise and "going short" is betting a stock will fall.
Paul Cherney, an analyst at Standard & Poor's, said that kind of short-term strategy and the resultant
options plays send stocks swooning.
"Stocks that are optionable see even more volatility," he said.
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