Stock Splits May Indicate A Topping Out, Strategists Say
Dow Jones Online News, Thursday, January 28, 1999 at 15:54
By Kate Berry, Staff Reporter
MIAMI -(Dow Jones)- The flurry of stock-splits in the past two weeks
could signal more than just raving enthusiasm about the stock market. It
could also mean a topping out or pending market correction, according to
some market strategists.
Dick McCabe, chief market analyst at Merrill Lynch & Co., said the
recent wave of stock splits by blue-chip issues, technology companies
and less-mature Internet firms make these sectors "vulnerable to a
correction."
"Stock splits often become more numerous some place near a market
top," McCabe said. "That's almost axiomatic because prices have risen.
But you tend to see more stock splits around peaks or market advances."
Stock-splits typically aren't used as a tool by technical analysts to
track movement in the stock market. Still, studies by Standard & Poor's,
the rating agency, show that companies that split their shares typically
do better than the general market, with individual stocks making their
biggest gains within two weeks of a stock-split announcement.
Among the long line-up of stocks that have announced splits in the
past two weeks are: Amazon.com Inc. (AMZN), America Online Inc. (AOL),
AT&T (T), Broadcast.com Inc. (BCST), Ebay Inc. (EBAY), E*Trade Group
Inc. (EGRP), International Business Machines Corp. (IBM), Intel Corp.
(INTC), McDonald's Corp. (MCD), McGraw-Hill Cos. (MHP), Microsoft Corp.
(MSFT), Sun Microsystems Inc. (SUNW), Xerox Corp. (XRX) and Yahoo! Inc.
(YHOO).
There is also evidence that large numbers of stock splits are
followed by downturns in the market, judging by a surge in splits in
1981, 1983, 1986 and 1989, one S&P study showed.
Arnie Kaufman, editor of Standard & Poor's weekly newsletter Outlook,
said stock-splits typically show that a company has strong earnings, a
strong share price and confidence of future growth.
"But it's really a lagging indicator of where the market has been,"
he said. "It could even be an indicator of a topping out. When splits
rise sharply it could be a sign that the market is too high."
Market watchers already have identified companies that could be solid
candidates for splits in the near future, including Cisco Systems Inc.
(CSCO), Lucent Technologies Inc. (LU), Pfizer Inc. (PFE) and Wal-Mart
Stores Inc. (WMT).
Companies often say they decided to do a split because investors are
attracted to low-priced stocks - typically those under $100, or even $50
a share.
"It's like buying a pound of butter, do you buy one pound or do you
prefer four quarters," said McCabe at Merrill Lynch. "It isn't a matter
that it makes the stock look any better or worse, it represents the
enthusiasm that typically accompanies a sharply rising trend in one
stock."
In fact, a stock-split doesn't fundamentally change anything about a
company's earnings prospects or financial performance, though there may
be a modest benefit from improve liquidity.
Still, McCabe thinks the end of the most recent, post-October advance
is near. He expects the market to stall or turn down this month, with
the Dow Jones Industrial Average retesting lows set last fall at around
7,500 to 8,000.
"We've had this revival, with a handful of larger-cap stocks,
particularly in technology and consumer staples," he said. "I think
there's going to be one more phase down here, maybe starting any day or
any minute."
- By Kate Berry 305-379-3744; kate.berry@cor.dowjones.com.
Copyright (c) 1999 Dow Jones & Company, Inc.
All Rights Reserved.
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