A couple of years ago, I profiled the 2 for 1 newsletter, a portfolio of 30 stocks comprised completely of companies that announced stock splits within six months of their purchase.
The newsletter — created by California general contractor Neil Macneale as an easily duplicatable system for investing his own retirement savings — has blossomed into a very interesting business. It has even spawned an exchange-traded fund, the Stock Split Index Fund (TOFR).
Each month, Macneale adds a company that is usually held for 30 months while simultaneously selling another which has come to the end of its holding period. In some instances, the stocks are held longer than 30 months, but those are special cases where there are no stocks to buy in a given month.
Otherwise, it’s one in, one out, each and every month.
Since September 2015 through the end of February, 11 stocks have announced splits of 2-for-1 or better, according to Macneale’s website. Of those, the 2 for 1 Index bought three of them — and I think Macneale is dead-on.
Here’s a look at the three stock splits worth owning right now.
Stock Splits to Buy #3: AmTrust Financial Services Inc (AFSI)
This is an unlikely one, as stock splits generally occur when a company’s stock is heading up and not down, as was the case with AmTrust Financial(AFSI), which announced its 2-for-1 stock split on Dec. 15, 2015.
On that day it closed trading at a split adjusted $30.35, $5.28 lower than where it stood just six weeks earlier. Losing more than 10% of its value in such a short period of time isn’t a ringing endorsement of AFSI or its stock. It’s only gotten worse in 2016, with AFSI stock down 18% year-to-date.
So why buy the specialty insurer today? Because it’s dirt cheap.
Whether you’re talking about its valuation metrics against its five-year historical averages or those of its peers, it’s trading at multiples well below what it should. If you take its current price-to-earnings, price-to-sales and price-to-book, multiply them together you get a product of 14.6. Its five-year averages taken together and those of its peers equals 24 and 20.6 respectively.
Yet, if you look at 2015 in terms of its financial results there’s nothing but double-digit growth in revenues, operating earnings, service and fee income … the list goes on.
If I were more comfortable evaluating insurance companies, I’d put AFSI at the top of this list and not in third position. Some might disagree, but with AFSI stock sitting at a little more than $25 and well off its 52-week and 5-year highs, I think it’s okay to be bold. This one will be going up sooner rather than later.
Stock Splits to Buy #2: Hormel Foods Corp (HRL)
Hormel (HRL) is on an acquisition binge that management hopes will help keep it growing in the years ahead while distancing the company from canned products, like Spam, which made it famous in the first place.
It seems millennials want healthy meals with minimum prep. To that end, Hormel made its largest acquisition in its history, paying $775 million for Applegate Farms, a maker of sausages and deli meats that’s free of hormones and antibiotics.
The move helped deliver a record earnings performance in Q1, with the bottom line jumping 37% year-over-year on the strength of double-digit growth in its refrigerated foods, grocery products and specialty foods’ segments.
Hormel stock has been on a hot streak over the past year, gaining 49% through March 1. It’s those gains that convinced management to announce a 2-for-1 stock split on Nov. 25, its second in the past five years. Wholly Guacamole, Skippy peanut butter, Muscle Milk and now Applegate Farms — these four acquisitions over the last four years has done a good job in transforming the company from its traditional role as a meat processor into a more rounded food conglomerate.
Shareholders continue to benefit from these moves and likely will for some time to come. When Hormel completed its acquisition of Wholly Guacamole on Aug. 24, 2011, its stock is up 216% to date, compared to 77% for the SPDR S&P 500 ETF Trust (SPY).
If you own Hormel stock, may the acquisitions continue.
Stock Splits to Buy #1: Nike Inc (NKE)
Nike (NKE) continues to deliver revenue and profit growth and that history of bringing its “A” game to the world of apparel has made founder Phil Knight the richest man in sports, with an estimated net worth of $24.4 billion.
Nike split its stock on a 2-for-1 basis on Dec. 23, the seventh in its 37-year history. A $10,000 investment in Nike stock when it went public in 1980 is worth $4.5 million as of March 1, an annualized return of 18%.
Who says the sports business isn’t lucrative?
Today, years after its founding, the company continues to exploit global trends in both sports and apparel. At the end of February Foot Locker (FL) announced Q4 results that easily beat analyst expectations with revenues up 5% year-over-year with adjusted earnings more than three times higher up 16%.
“(Foot Locker) is the greatest beneficiary of the ongoing strength of Nike, and new momentum from Under Armour (UA) and Adidas,” wrote Sterne Agee CRT analyst Sam Poser at the time. “We firmly believe that the bear thesis of peak margins and the death of the athletic business are completely wrong.”
The athleisure trend that’s gripped the fashion business in recent years continues to be one of the better performing segments; one must look no further than Lululemon (LULU) to understand how deeply ingrained this trend is in the consumer’s psyche.
While I recently recommended to investors that when it comes to stocks to buy, Under Armour is better than Nike stock, I do believe that Nike has a real chance to come close to matching UA’s stock performance over the next five to 10 years. Should the Beaverton behemoth succeed in prying LULU from Under Armour’s grasp, I think it’s fair to say that more stock splits will be just around the corner.
In my opinion there aren’t too many investments as stable as those in sports-related businesses. As long as we like sports, companies like Nike will continue to do well. It’s that simple.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.