Amusement park giant Six Flags Entertainment (NYSE: SIX) has seen its stock price climb steadily across the last year, much like the steep hills its roller coasters climb right out of the station.
And today, that stock price is going to lurch downwards like the first gut wrenching descent of that coaster – as Six Flags stock “splits” in two.
Sounds scary for investors and thrill ride fans alike, right? Well, relax. In reality this white-knuckle ride doesn’t change a thing – and may actually be profitable for savvy traders who know what to do.
So what’s going on? Well, the fast-growing company is executing a 2-for-1 stock split. This means just what it sounds like – Six Flags’ share price will drop by 50% and the stock market will boast twice as many SIX shares.
While not common, stock splits aren’t anything to be afraid of. In fact, the Six Flags split may provide a profitable ride for savvy investors.
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Here’s the general idea behind a stock split. For sundry reasons, a company decides to adjust its outstanding stock price to make the company more appealing to investors. It’s strange but true, but the sweet spot for a stock price is between $25 and $50. A great deal of investors think companies with stock prices of less than $25 signal a business that’s small potatoes and that stock prices higher than $50 signify a company that’s too pricey. Don’t ask me why.
Perhaps that’s because often an expensive stock price reflects a quick run-up in stock – and a stock split can make the company seem like more of a “deal” to investors instead of a stock that has already surged. Consider Six Flags: The company emerged from bankruptcy in May 2010 and shares skyrocketed, with SIX stock doubling in value over the last 12 months. And the momentum hasn’t waned, with Six Flags tallying over 35% gains so far in 2011 — over 10 times the broader stock market. SIX stock now trades for around $75 a share, with 27.5 million shares outstanding for the company in total.
After this thrill ride run, Six Flags’ board of directors want to make SIX stock more affordable and thus more attractive – simply, a pick that Wall Street is more likely to “buy low” than “sell high.”
At least on the surface, anyway. The 2-for-1 split means the company will have double the shares at half the price, trading for around $37 instead with about 55 million shares after all is said and done. Anyone who does the math understands this is just a shell game. The total value of the company is just north of $2 billion when you multiply price times shares outstanding. In fact, Six Flags could have done a 3 to 1 split or even a 10 to 1 split and it wouldn’t have changed the core value of the company. It’s just a question of slicing up the pie in different ways.
So what does this mean to investors? How can you profit if the company value doesn’t really change?
ell, it’s all about emotion and investor psychology, that’s why. And we all know that Wall Street’s crazy antics often have little to do with reality.
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Simply put, many investors will buy in after a split thinking the stock is “cheaper,” when in fact nothing about the company has changed other than its price. And that buying pressure allows you a chance to profit big if you buy in ahead of time.
Don’t believe me? Consider Baidu (NASDAQ: BIDU), a search engine giant often referred to as “China’s Google.” The company was trading for north of $710 in early 2010 – a figure many investors thought far too rich. So Baidu split its stock 10 for 1, to get down to a more manageable $71 a share. Except it didn’t stay at $71 – by the end of trading the first day after the split, BIDU was going for $78 a share. That’s a stunning 10% gain overnight.
But the company sales, profits and market size remained exactly the same. Baidu was just doing the math differently.
Of course, the post-split bounce doesn’t always happen – a number of splits in early June didn’t change a darn thing for the participating stocks including Enbridge (NYSE:ENB) and Church and Dwight (NYSE:CHD). What’s more, a 2 for 1 split is hardly as game-changing as a 10 for 1 split like Baidu saw.
But for savvy investors willing to take a bit of a risk on a 24-hour trade, the Six Flags split after the close today could be the perfect opportunity to get in and get out for a quick profit.
Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
