7 Stocks That Should Reverse Split

by Dan Burrows | December 14, 2012 1:06 pm

It seems like Alcatel-Lucent (NYSE:ALU[1]) has been on the cusp of death forever, but a new multi-billion-dollar line of credit will keep the maker of telecommunications equipment from insolvency after all.

Shares in Alcatel-Lucent popped as much as 11% on the news that Credit Suisse (NYSE:CS[2]) and Goldman Sachs (NYSE:GS[3]) are providing the company with about $2.1 billion in senior secured credit facilities (loans, essentially).

Of course, that big percentage gain in the stock is less impressive when you realize that Alcatel-Lucent goes for about $1.20 a pop. That’s right: the 11% gain amounts to just 12 cents a share.

Not too long ago we wrote about stock splits[4] and how, while kind of stupid, they would help a number of companies with shares that are simply too pricey by face value for retail investors (and algorithms) to swing.

Alcatel-Lucent’s big rally got us thinking about the opposite: Pathetically priced shares that could benefit from a reverse split.

Reverse-splitting a stock is just as dumb as splitting one, for all the same reasons. Nothing about the underlying business — sales, margins or profits — has changed, and that’s what ultimately drives share performance, at least over the long term.

Remember that splitting a stock is no different from me giving you five $20s in exchange for a hundred-dollar bill. Sure, you now hold five pieces of paper instead of just one, but you still have exactly 100 bucks — no more, no less.

A reverse split is the exact opposite: I give you a hundred-dollar bill in exchange for five $20s. If my business is going bankrupt, that shuffling of paper certainly isn’t going to help.

Usually companies effect a reverse split in order to keep from getting kicked off an exchange. The New York Stock Exchange (NYSE:NYX[5]), for example, will delist your stock if the average closing price falls below $1 over a consecutive 30-day trading period.

Reverse-splitting a stock has some other benefits, as well. There’s a lot of institutional money out there that can’t buy shares with face values below a certain threshold. Additionally, it can help tamp down volatility, since it’s much harder for algos and daytraders to whip around big chunks of stock that go for, say, $150 a share rather than a buck-fifty a share.

In the case of Alcatel-Lucent, if the company effected a 20-1 reverse split, a stock that has a nominal value of $1.20 would suddenly list at a respectable-sounding $24. The number of shares outstanding would shrink by a factor of 20, but — importantly — the market cap, fundamentals and prospects wouldn’t change a whit.

Still, it would sure look a lot better — and it could help with demand, too.

With that in mind, here are seven other stocks that could really spruce up their images (if not their returns) with reverse splits. They all have market caps of at least $1 billion and share prices below $5 as of Dec. 13.

Sirius XM Radio (NASDAQ:SIRI[6])
Price Now: $2.41
Price After 20-1 Reverse Split: $48.20

Chimera Investment Corp. (NYSE:CIM[7])
Price Now: $3.16
Price After 20-1 Reverse Split: $63.20

Wendy’s (NASDAQ:WEN[8])
Price Now: $4.73
Price After 20-1 Reverse Split: $94.60

Groupon (NASDAQ:GRPN[9])
Price Now: $4.80
Price After 20-1 Reverse Split: $96

Zygna (NASDAQ:ZNGA[10])
Price Now: $2.62
Price After 20-1 Reverse Split: $52.40

Advanced Micro Devices (NYSE:AMD[11])
Price Now: $2.41
Price After 20-1 Reverse Split: $48.20

Frontier Communications (NASDAQ:FTR[12])
Price Now: $4.71
Price After 20-1 Reverse Split: $94.20

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. ALU: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALU
  2. CS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CS
  3. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  4. we wrote about stock splits: https://investorplace.com/2012/11/stock-splits-would-lift-these-sagging-shares/
  5. NYX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NYX
  6. SIRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIRI
  7. CIM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CIM
  8. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  9. GRPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRPN
  10. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  11. AMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMD
  12. FTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FTR

Source URL: https://investorplace.com/2012/12/7-stocks-that-should-reverse-split/
Short URL: http://invstplc.com/1ntZCFM