Chuzz: Did Michael make the wrong move to split the stock at 80 to counter the $ 5.2B revenues? With the price so low should not Dell be buying back the stock? Any announcement to that effect will not hurt.
From today's IBD:
Stock Splits Often Bullish But Some Signal
Trouble
Date: 3/12/99
Author: Leo Fasciocco
Say stock split and almost every new investor gets excited.
Why?
Well, the reason is usually because the stock to split is a hot number.
However, one must always consider certain factors to determine whether a
split is a bullish or even a bearish omen.
Some recent splits occurring with popular names include Amazon.com at
3-for- 1, Yahoo 2-for-1, America Online 2-for-1, Amgen 3-for -1 and
Oracle 3-for-2.
Remember that a stock split doesn't change the value of your holdings.
If you had 200 shares of Yahoo Feb. 8, prior to the split taking effect, the
value was $43,650. That would be 200 shares at $218.25 a share. After
the split, you have 400 shares selling at $109.125. The value would be the
same $43,650.
Directors of a company usually vote a stock split after an advance in the
stock's price. The theoretical idea is to make the stock's price more
appealing to the average investor by keeping it relatively low and making
more stock available.
Many investors interested in AOL no doubt balked when they saw its price
at 180 a share. They couldn't afford to buy a round lot. A round lot
consists of stocks sold in hundreds of shares. Round lots traditionally have
carried lower commissions.
However, after the split, AOL sold for 88. So one could buy a round lot
of, say, 100 or 200 shares. AOL announced when it made the stock split it
was doing it to make the stock's price more accessible to average
investors. That is a clear example of why a top-notch firm votes a split.
You might ask: What is so important about a split to me if there is no
change in true value?
The answer is there is a psychological boost that sometimes helps send the
stock's price higher. It's a phenomenon observed by analysts for years.
A bullish stock split scenario sometimes goes like this:
First, the stock may jump a few points the day the split is announced.
Second, the stock may trend higher in the weeks prior to the spilt taking
effect. Third, after the split takes effect, the stock may sell off on profit
taking.
Does it happen exactly that way every time? No.
AOL announced its split Jan. 27. That day the stock jumped 5 1/4 points
to 82 3/4 (post-split price). The stock moved higher the next two days to
get to 88 1/2. It then fell back with the decline in the market touching a low
of 71 Feb. 10. However, it rallied into the split date by getting to as high as
91 7/8.
Is it a good idea to buy a stock when it announces a split?
It depends.
The split itself should not be the sole reason to buy. Instead, one must
consider the company's earnings growth and its stock's technical pattern.
You want to try to go with a company with profits growing at least 20%
and a stock in an uptrend and hopefully just moving out of a basing pattern
of several weeks.
Some stocks with approaching 2-for-1 splits are International Business
Machines on May 27, Sun Microsystems April 9 and Intel April 12.
Although a stock split is usually good news, there are times when it can be
a warning. A stock that splits 2-for-1 or more several times within, say,
two years, or has a big split like 5-for-1, may be topping out.
There are two reasons. One is the stock's price may be up sharply and due
for a normal pullback. The second is that too many splits increase the float
-shares outstanding not held by insiders. That makes the supply of the
stock greater and can cause an imbalance of the supply-demand equation.
Dell Computer made its fourth 2-for-1 split in the past two years on March
8. The stock is now in a pullback, having declined from a high of 110 Feb.
2 to 86.
Stock splits done by too many companies at one time can be a sign the
stock market may be near a top. To track that, IBD publishes in its
psychological market indicators, total stock splits the past 30 days in
companies making up the IBD 6000 Index.
The last major high in splits was June 19, 1998, when IBD found 211
stock splits. The Dow was at 8713. It rallied to 9300 the next four weeks,
but then went into a severe correction, tumbling to 7400 the next seven
weeks.
Some firms will do a ''reverse stock split.'' Osicom Technology did just that
in July of last year. It voted a 3-for-1 reverse split. That means every three
shares owned would equal only one. A company will do that to lift the price
of the stock to a more respectable level.
Stocks that do reverse splits can be good plays if one has faith in what is
usually a turnaround situation with the business. However, they are often
extremely speculative. Osicom so far has turned out well. The stock hit a
low of 1 7/8 in September, two months after the split. Although the local
networking company isn't making any money, its stock is now at 15 and
has a 98 Relative Strength rating from IBD.
Stock splits deserve the attention of new investors. However, one should
look at them in an objective way, seeking to know just what may be bullish
or bearish about them.
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