Morgan:
The statistic, while seemingly compelling, is typical academic nonsense. Think about it. There are roughly 20,000 stocks available to be traded. If we compare the universe of stocks that split, to the 'non-splitting' universe, we are arithmetically including a huge basket of companies that may be undergoing some form of financial duress. Presumably a prudent, and otherwise skilled investor, would avoid companies in an obvious state of fundamental decline (just as, presumably, the stocks of these declining companies are not splitting). So, the negative performance of the declining universe, which is adversely selected, distorts the arithmetic comparison between split-versus-non-split stocks. Think about it this way. I would strongly suspect that the stock of companies reporting rising earnings comparisons would show even more dramatic outperformance (than your cited study) when compared to the stock of companies reporting negative earnings.
I would argue that stocks tend to split AFTER they had appreciated rapidly, so the 'split-oriented' investor is often engaging in a Newtonian-based momentum strategy, i.e. an object in motion, in this case a rising stock price, tends to stay in motion. Again, this is all fine and dandy in a bull market...and, as I believe in the case of Qualcomm, it is quite possible that the split has come on the heals of a substantive positive change in corporate fundamentals that might, as you suggest, presage prosperity for some time to come. In this case, the split is a CONSEQUENCE of fundamental prosperity NOT the causal factor. That is my principle point. Splits, in and of themselves, mean nothing. People who react to the split, rather than the fundamental framework underlying the split, put themselves in harm's way.
All the best,
Gregg |
