Source: PaxForex Premium Analytics Portal, Fundamental Insight
As investors face inflation approaching 8%, record-high gasoline prices, and the heartbreaking tragedy in Ukraine, a distraction to discuss something interesting can be helpful. Few things excite investors more than a timely stock split.
While a split doesn't affect the fundamental value of an investment, there are several ways in which a stock split can affect the market and help amateur investors. On March 9, Amazon joined Alphabet in announcing a 20:1 stock split.
Amazon's announcement of the split was long overdue and is interesting news for investors, especially against the backdrop of Alphabet's announcement. Amazon stock will begin trading with the split amendment on June 6, and the split of parent company Google stock will go into effect on July 15, subject to shareholder approval. Other recent blockbusters include Apple, Tesla, and Intuitive Surgical. The post-split dynamics of these stocks have been mixed. Apple and Tesla rose significantly after the August 2020 split, while Intuitive declined after the late 2021 split.
So what exactly is a stock split and why do companies do it?
Companies split stock for a variety of reasons. One is psychological: average investors may be discouraged by the fact that their stock is trading at $1,000 a share. It can also be cumbersome: consider an investor who would like to invest $5,000 in Amazon stock. Since Amazon is trading at about $3,000 per share, this is not possible. When the company does a 20:1 split, it will be much easier to achieve the desired distribution.
In another situation, an investor might deposit a certain amount into an investment account each month, say $500. Would that investor want to wait six months to buy one share of Amazon stock? Probably not. That's how a stock split can be especially beneficial to small shareholders and employees.
Another reason for the split is inclusion in the Dow Jones Industrial Average. Since Alphabet and Amazon trade for a few thousand dollars a share, they can never be included in the Dow because of the way the index is calculated. The Dow calculates its index by summing the stock prices of its member companies and then dividing by a certain number. Because of this, the stocks must have a similar value or the index will be heavily weighted by one stock. Both Alphabet and Amazon would be candidates for inclusion in the Dow after the split. This is probably the most compelling reason for a company to do a split.
Inclusion in the Dow supports the stock's value. Many investment tools track the Dow index, so companies included in it are in high demand.
There are many candidates to be the next big company to announce a stock split, and Tesla could be back on deck for several reasons. First, it's great publicity, and Elon Musk tends to enjoy the attention on Tesla. Since the last split was announced, the stock has performed exceptionally well, as shown below, even after the recent swoon.
In addition, with gasoline prices skyrocketing and no sign of them dropping anytime soon, now is a good time to draw attention to electric cars. Tesla should be an excellent candidate for inclusion in the Dow through a stock split. Finally, Tesla has always been very popular with individual investors, and there is little doubt that the company wants to keep the stock affordable.
The timing may be right, as the current price is above $750 per share. The stock price at the time of the 2020 split announcement was just under $1,375. From the announcement to the day the split takes effect, the stock price has risen 49% to over $2,000 per share. However, if Tesla management is looking to get into the Dow index, it is unlikely that the company will wait until the price reaches that mark again. In addition, given the positive impact on the stock price in 2020, management could use the split as a catalyst in a disappointing 2022 for the stock price. Investors will be watching the company closely in anticipation of a possible announcement.
Other candidates for the split include Chipotle Mexican Grill, Shopify, and even AutoZone. Shopify stock has been struggling recently, dropping nearly 60 percent in a year. This may make the company's management hesitant to do a split. Both Chipotle and Auto Zone are trading at more than $1,000 a share, and AutoZone is approaching the $2,000 mark. Chipotle has never done a stock split, and AutoZone hasn't done one since 1994, though the stock has risen more than 17,000% since then.
As long as the price is above the 750.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 839.00
- Take Profit 1: 880.00
- Take Profit 2: 950.00
Alternative scenario:
If the 750.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 750.00
- Take Profit 1: 705.00
- Take Profit 2: 650.00
