Neal MacNeale’s investment newsletter, 2 for 1, has an enviable track record over the 14 years it’s been covered by the Hulbert Financial Digest. It covers a 30-stock portfolio made up of companies who’ve announced a stock split within the last six months.
The newsletter has been so successful that MacNeale created the 2 for 1 Index in January, which has subsequently led to the launch September 16 of the Stock Split Index Fund (TOFR) — an ETF replicating the performance of the index itself.
Stock splits usually happen only when management is optimistic about the company’s performance in both the near and long terms. That makes stock splits an obvious buying signal. MacNeale’s process demonstrates that stock splits outperform the Wilshire 5000 when held for a 36-month duration. Yahoo Finance data suggests there have been 45 stock-split announcements (2-for-1 or greater) so far in 2014.
Here are my five favorite stock splits worth owning.
Stock Splits to Love — Apple (AAPL)
I couldn’t resist leading with Apple (AAPL), whose stock is up 34% (82% on annualized basis) since announcing the 7-for-1 stock split April 23. That’s pretty darn good. However, there’s more to this than simple mathematics. Yes, Apple’s stock was 1/7 as expensive after the split in terms of nominal dollars, but nothing changed with its valuation. It was still priced at roughly 16 times earnings at the time.
MacNeale got the idea for using stock splits from David Ikenberry, dean of University of Colorado’s Leeds School of Business, who performed several studies on the subject as a finance professor in the 1990s. Ikenberry found stock splits were a telltale sign of bullish management, suggesting Tim Cook et al. are extremely so. It also doesn’t hurt that Apple is bringing out a new and larger iPhone, 6 which has seen boffo pre-orders.
The next three years, if MacNeale’s right, should be very good for AAPL stock.
Stock Splits to Love — Middleby Corp (MIDD)
I’ve been a fan of Middleby Corp. (MIDD), and its CEO Selim Bassoul, for a number of years. Bassoul has held the top job since January 2001 and in that time, MIDD stock is up 39% on annualized basis. Not too many leaders of public companies can make such a claim, especially when you consider that Middleby was on the verge of bankruptcy when Bassoul stepped in.
Middleby is up more than 10% since its stock split three-for-one in late June. And there’s plenty of reason to expect that growth to continue.
In recent years, Middleby has grown through small, bolt-on acquisitions like the one it made September 8, purchasing Seattle-based Concordia Coffee Company, a manufacturer of self-service coffee and espresso machines for the commercial foodservice industry. With revenues of $15 million annually, Concordia is a blip on the radar, but it adds to the competency of its beverage offerings.
Bassoul and his team do a great job integrating acquisitions no matter the size. In 2013, Middlebuy made its biggest buy yet, purchasing the Viking Range Corp. for $380 million. Why the move into the consumer market? Because it thinks it can do with the consumer market what it’s already done with commercial. While it’s got a long way to go on this front as long as Bassoul’s at the helm it should be smooth sailing.
Stock Splits to Love — Allied World Assurance (AWH)
Swiss-based Allied World Assurance Company Holdings AG (AWH) announced September 18 that it acquired the Hong Kong and Singapore operations of RSA Insurance Group (RSNAY) for $215 million. The move drastically increases its presence in Asia in specialty lines such as construction and engineering, marine and property. In addition to immediately accretive earnings, AWH gains a business that has been in Singapore for 180 years. You can’t put a price on experience.
One of the most important numbers in the insurance business is book value per share. Over the past five years AWH has grown its book value per share by 107% compared to an average of 63.4% for its peers. Add to this a combined ratio of 85.1% in the first half of 2014, and it’s obvious that the company knows a thing or two about insurance. While AWH stock isn’t doing great in 2014 — down 2% year-to-date — I suspect its 3-for-1 stock split, which took place May 23, is a sign that things are about to change.
Stock Splits to Love — ACI Worldwide (ACIW)
This next stock split 3-for-1 on July 11. ACI Worldwide (ACIW) specializes in electronic banking and payment solutions for various industries, including retail and financial services. Its software processes $13 trillion in payments and securities transactions annually around the globe. I think ACIW is more than aware of the implications of Apple’s mobile wallet and will likely benefit from any further push toward mobile payments.
Key numbers in its Q2 report include 4% organic revenue growth, recurring revenues accounting 75% of total in the quarter and a 60-month backlog of $3.9 billion. The company posted adjusted EBITDA growth of 76% year-over-year and free cash flow of $28 million — 29% higher than a year earlier. Factor in its $205 million acquisition of Retail Decisions, a U.K.-based e-commerce and fraud protection company and ACIWs recurring revenue looks even more promising going forward.
Of all the stock splits on this list, ACIW appears to have the greatest upside.
Stock Splits to Love — ServisFirst Bancshares (SFBS)
ServisFirst Bancshares (SFBS) is a mid-tier bank operating out of Birmingham, Alabama, with offices in three states including Alabama, Florida and Tennessee. American Banker recently ranked it 9th among mid-tier banks between $2 billion and $10 billion in assets. SFBS is the only Alabama bank to make the rankings.
The holding company was founded by current CEO Tom Broughton III in May 2005. In the past four years, Broughton has increased net income from $5.9 million in 2009 to $41.2 million in 2013. In May this year, SFBS went public at $91 per share, subsequently splitting its stock 3-for-1 on July 17. Its stock hasn’t done much as a public company but its financials over the past five years are first-rate.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.