Friday, June 6, 2014

Stock splits in a bull market

One of the problems confronting investors at this stage of the recovery has been the extraordinarily high share prices of several blue chip companies.  Institutional favorites like Google (GOOG) and Apple Inc. (AAPL) are priced above $500/share, putting these stocks out of reach for many investors.  Even institutional investors have shown diminished interest in AAPL this year, according to research reports.  That trend may be about to change, however, if Wednesday’s news is any indication.

Apple announced a 7-for-1 stock split which was greeted with enthusiasm on Wall Street.  This will mean that its share price will be significantly reduced, allowing for more investors to buy in at what many analysts deem to be reasonable prices.  In the days and weeks immediately following a split the price of the splitting stock sometimes declines before bottoming and eventually rallying to new highs.  Historically, though, stocks tend to outperform in the 2-3 years following splits.

Stock splits tend to be popular as a bull market matures, attracting more investors while at the same time keeping stocks within reach of smaller investors. 

[Excerpted from the June 4 issue of Momentum Strategies Report]