by Jeff Reeves | April 25, 2012 11:54 am
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.
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.
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