Tech-Stock Setback
Doesn't Hurt Splits
By ROBERT O'BRIEN
Dow Jones Newswires
June 8, 2000
This year's setback in technology stocks has injured the IPO market and damaged merger activity. But it hasn't been able to put much of a dent in one other feature usually associated with a bull market: stock splits.
In fact, the number of companies announcing stock splits -- long used as a way for companies to attract more investors to their stock -- has continued almost unabated. In the first five months of this year, a total of 560 companies declared stock splits, according to Thomson Financial Securities Data, which has collected the figures.
Skeptics have said all along that stock splits are like the air the pastry chef whips into a mousse: It doesn't make the confection any richer or any tastier, just frothier. But splits still cause excitement for investors. "There is no fundamental reason a stock should go up because of a stock split," says Eric Shatsky, managing director of Geometric Capital Management, said of investors' strategy of riding the momentum of stock splits. "All they're announcing is that the pie will be cut up into smaller pieces." (Nevertheless, Mr. Shatsky has been drawn into the game from time to time. "Once everyone got involved, I had to trade it also," he said.)
The list of well-known companies now at some stage of the process of splitting their stock would make an interesting portfolio: Alcoa Inc., Apple Computer Inc., Chase Manhattan Corp., Intel Corp., Exodus Communications Inc., Nvidia Corp., Juniper Networks Inc. and Tiffany & Co.
Projected over a full year, the current pace of splits is not only a huge increase over the 932 stock splits declared last year; it also could mean that the record of 1,195 splits three years ago will be overtaken.
To be sure, the number of split declarations cooled some in May, in response to tepid market conditions. But the decline to May's tally of 79 from April's total of 105 doesn't suggest that the appetite for stock splits has dried up the way, say, the market for initial public offerings of stock has.
Is corporate America using stock splits indiscriminately? Some traders and analysts say so.
The rule of thumb, Jack Shaughnessy, chief investment strategist at Advest, said, used to be that stocks trading beyond $35 a share discouraged individual investors. That figure, because of inflation in financial assets, may be higher these days, but, nevertheless, it's probably safe to say that many individual investors think twice about buying a stock with a price tag of $100 or more.
Unless they think a split is coming. "A lot of investors figure that a stock at $100 is going to split, and they figure they'll get two shares for every one," says Pete Barry, a self-employed trader and head of StockSplits.com, an Internet site that tracks split activity.
Some companies appear to hold off announcing a split, which just whips the crowd into a further frenzy. As shares push up past $125 or so, the prospect of a split, at least in some investors' minds, looks more and more certain. By the time the stock splits, shares may be trading for $150 a share, or more. So following a 2-for-1 split, the stock trades at $75 a share.
David Ikenberry, a professor at the Jones Graduate School of Management at Rice University, who has researched the subject extensively, says splits are "remarkably innocent on the direct impact they have on a company-which is nothing."
Horsefeathers, say the representatives of the cottage industry that has sprung up around stock splits. "Stock splits are the most clever piece of marketing that any company ever devised," said Roger Perry, president and chief executive of Rightline.net, an online newsletter operation that reports on splits.
Whatever the parties to the debate may say, trading patterns don't lie: Stock splits have been a catalyst for a lot of action this year.
Take a look at how Rambus Inc., the Mountain View, Calif., developer of high-speed memory technology, traded in March, when it unveiled plans for a stock split. At its March 9 close, it had run up 46.9% in a week's span, after Intel, a key customer of Rambus technology, said that the company would continue to play a critical role in its personal-computer products. On March 10, the day the company's board announced plans to split its stock on a 4-for-1 basis, shares ran up 11%. In the three ensuing days, Rambus shares traded as much as 11% higher, before the stock topped out March 14 at $471 a share.
The irony is that the company said it wanted to split the stock as a means of easing volatility. |
