KhanMR <<Does your model account for the split factor, keeping in mind that there is a run up after the split announcement and no one wants to sell. Did pfe show a valley after previous split announcements. Just curious how you have constructed the model>>
Khan: Good questions and on the minds of many PFErs since last week.
First of all, The Peabody Model relies partially on historical PFE and market trends and partially on Mr. P's gut-feels..... based on current and projected future trends. So the easy answer is yes.....PFE splits are factored into the Model.
But, let's cranked out the Wayback Machine, explore the 1997 PFE split and see what we can find:
First the facts about the PFE 1997 Split:
-On January 23, 1997, the PFE Board announced their intention to split the stock 2-1 with PFE @88 with an estimated effective date of 6/30/97.
- Within 26 days (2/18/99), PFE climbed to a Peabody Peak of 99.75 (+13.3%).
-However, within 44 days (4/03/97), PFE declined 17% ....with the general market.... to a Peabody Valley of 41.50. This represented a 5% decrease over the original PFE announcement price.
- On the actual split date (6/30/97), PFE had climbed to 119.75 representing a 44% increase from the 4/03/97 Valley and a 36% increase over the PFE announcement price.
-From July 1, 1997 to December 31, 1997, PFE went through 4 Peabody Peaks and 4 Peabody Valleys and ended the year at a split-adjusted price of 74.56 (149.12). This represented a 25% increase over the June 30th split date.
Peabody Analysis:
- Peaks and Valleys do occur during the split announcement period. However, the number of Peaks and Valleys is significantly less than the post-split period. In 1997, there were only 2 Peaks/ Valleys during the 5 month split announcement period as compared to 8 Peaks/Valleys in the following 5 month post-split period. Conclusion: the split announcement builds a psychological base that helps minimize PFE declines..... resulting in fewer Peaks and Valleys during the period. However, volatility seems to pick up following the split.
-Overall, as noted in today's Motley Fool Post of the Day, splits do not make stocks more valuable. You basically are receiving 3 $10 bills for a $30 certified check.....However, historically PFE splits definitely don't hurt and do certainly seem to make the stock more attractive......as shown by the PFE growth rates on split years:
PFE Dow
Year Dow PFE % Chg % Chg Premium .
Date Index Price Prior Yr Prior Yr PFE/Dow Comments
12/31/87 1,896 5.82 -25.0% 0.0% -25.0% Bear market/market crash
12/30/88 2,169 7.25 24.7% 14.4% 10.3%
12/29/89 2,753 8.69 19.9% 26.9% -7.1%
12/31/90 2,634 10.10 16.2% -4.3% 20.5%
12/31/91 3,168 21.00 108.0% 20.3% 87.8% 2-1 split (2/91)
12/31/92 3,301 18.13 -13.7% 4.2% -17.9% Clinton elected president
12/31/93 3,754 17.25 -4.8% 13.7% -18.6% Healthcare reform pending
12/30/94 3,844 19.32 12.0% 2.4% 9.6%
12/29/95 5,117 31.50 63.1% 33.1% 30.0% 2-1 split (6/95)
12/30/96 6,448 41.50 31.7% 26.0% 5.7%
12/31/97 7,908 74.56 79.7% 22.6% 57.0% 2-1 split (6/30/97)
12/31/98 9,181 125.00 67.6% 16.1% 51.5% Viagra approved (3/27/98)
1/29/99 9,367 133.75 7.0% 2.0% 5.0% Celebrex launched (1/19/99)
Average 31.6% 14.6% 17.0%
Conclusion:
In a surprise to many investors, PFE never goes strike up...split or no split! There will always be PFE profit-taking as the general market declines or "drug stocks are reported in Barrons as over-valued and PEs too high". As a long-term holder on PFE, this is actually great news because it provides an opportunity to add PFE at a discount.
Other great split companies to consider include : MSFT, AOL, and CSCO.
I hope this helps!
BigKNY3 |
