Don’t ask me why investors bid up shares of a company after a stock split. They just do, regardless of the industry.
That’s why you might want to have capital clear this summer for a swing trade in Coca-Cola (NYSE:KO), buying on a dip in the days before it executes a proposed 2-for-1 stock split in August. You could make an easy 5% gain on this trade.
Why? History tells me so.
In January 2010, Warren Buffett’s iconic Berkshire Hathaway (NYSE:BRK.B) split its “baby B shares” 50-for-1 to bring them down from $3,500 per share to around $70. In the first 30 minutes of trading after the split, B shares of Berkshire leaped 5%.
In May 2010, Chinese Internet stock Baidu (NASDAQ:BIDU) split 10-to-1 to bring its shares down to earth from the $600 level. Forgetting the “drop” in share prices due to the split, the value of Baidu shares jumped 8% on no news.
Oh, and I guess its worth pointing out that the last time Coke split 2-for-1 in 1996, shares popped 2.5% in the first day of trading and ran up 13% across the next 10 trading days. Shares ran up over 40% in the 12 months after the move, doubling the broader Dow Jones in the same period.
When a big stock with a big brand splits, it pops. Maybe it’s because investors didn’t pay attention to the news and think they are buying a dip. Maybe it’s because some computer trading isn’t adjusted and triggers a buy for the same reason. Maybe it’s because smaller investors afraid of high-priced stocks are finally enticed into buying.
Honestly, I have no idea why it happens — the point is that it frequently does happen.
Let me be crystal clear: A stock split doesn’t change a thing other than divide the share price in two and double the shares outstanding. Coke will go from almost $80 per share to almost $40 per share, and the number of shares on the market will increase from roughly 2.26 billion to 4.52 billion.
If you have 100 shares of Coke at $80 worth $8,000, after the split you will have 200 shares of Coke at $40 — still worth $8,000.
That’s it. Profits won’t change. Revenue won’t change. The price of Coke at the grocery store won’t change. The budget for advertising won’t change.
But for some reason, stocks usually pop after a split.
The splits rule isn’t bulletproof, of course. Smaller stocks like cosmetics queen Estee Lauder (NYSE:EL), retailer TJX Companies (NYSE:TJX) and energy drink giant Monster Beverage (NASDAQ:MNST) all split 2-for-1 earlier in 2012 — and TJX tallied a mere 1% gain after the move while Estee Lauder and Monster both notched a tiny loss in the first day after the stocks executed splits.
Of course, all those stocks also have outperformed the market dramatically in the past few months since their splits.
- EL is up 10% since its Jan. 23 split, while the Dow is up just 3%.
- TJX is up 18% since Feb. 9, while the Dow is up less than 2%.
- Monster is up 18% since its Feb. 16 split, while the Dow is up just 2%.
There are a host of reasons to buy Coca-Cola regardless of the split. It’s a bulletproof brand, it reported strong Q1 earnings, it boasts a 2.7% dividend yield and is the largest holding by Buffett and Berkshire Hathaway.
You could do worse than own Coke right now — especially considering the history of how stocks run up after a split.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.