Why Investors Should Be Cautious About Stock Splits
In recent years, we’ve observed numerous significant stock splits as companies strive to enhance liquidity and lower barriers for new investors. Splits can reduce share prices, making stocks more accessible to a wider range of investors, although the advent of fractional share investing has mitigated the issue for many.
However, it’s important for investors to avoid a blind rush to buy shares following a split. Here’s why.
Understanding Stock Splits: A Cosmetic Change
It’s essential to recognize that stock splits are merely cosmetic adjustments that do not influence a company’s overall valuation. A split increases the total number of shares while proportionally lowering the share price, leaving the company’s market capitalization unchanged.
The core financial health of the business remains intact following a split. Instead of viewing splits as buy signals, investors should understand them as indicators of a company’s robustness. Companies typically announce splits when their share prices rise significantly, suggesting a general bullish sentiment.
Instead of focusing on splits, investors should prioritize factors that genuinely drive share prices higher. Key indicators include positive revisions to earnings estimates, guidance upgrades, and substantial sales growth.
Recent Noteworthy Stock Splits
For instance, Tractor Supply Co. (TSCO) executed a 5-for-1 stock split in late December. Since then, its shares have decreased by approximately 2.5%.
Image Source: Zacks Investment Research
Similarly, Palo Alto Networks (PANW) initiated a 2-for-1 split in late December, with shares falling nearly 12% since this action.
Image Source: Zacks Investment Research
The Bottom Line
Stock splits are often met with optimism, as they offer more investors an opportunity to participate. While this is a favorable development, it is crucial to understand that stock splits do not constitute a definitive buy signal. Investors should concentrate on the fundamental aspects of a business that influence its long-term value.
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Tractor Supply Company (TSCO): Free Stock Analysis Report
Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
