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On August 31st, Both Tesla and Apple will be splitting their stock. With TSLA it’s a 5 for 1, and with AAPL it’s a 4 for 1.
This is interesting and actually fun for a change. See, way back in the 90’s, companies split their stock a LOT. In fact, stock splits were so popular and so many people “chased” them, that we actually sold a product devoted to stock splits. It was literally a phone pager. When a split was announced, we’d send an alert to our paying subscribers, which told the company symbol, the type of split and the date.
It was enormously popular. But why? Well, that’s a good question and one I’m willing to debate. So let’s dig into the idea of a stock split. First of all, what they hell are they? A split is nothing more than this: All publicly-traded companies have a set number of shares that are outstanding. A stock split is a decision by a company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.
Okay, so most stock splits are 2 for 1 or 3 for 1’s. What’s that mean? Well, suppose you have 100 shares of XYZ at 20 bucks per share. They announce a 2 for 1 split. You will then have 200 shares of XYZ, but at the price of 10 dollars per share.
Hmm, you think to yourself. Nothing’s changed! And that’s what Wall Street tries to tell you, that the “value” is exactly the same. 100 shares at 20 bucks is 2000 dollars. 200 shares at 10 bucks each is… 2000 dollars. So yes; the value, the “market cap” and everything else stays the same.
Okay again…why do they do it? There’s several reasons. The most common is that when their stock gets so expensive that the average investor can’t afford it, a split is a way to lower the market price of the stock, and then attract more people that wanted in, but really couldn’t afford it. They also split their stock when similar companies in the same industry are trading well below their stock, and are getting more volume than they are. So, they do a 2 for 1 or 3 for one.
Wall Street will tell you that there’s nothing special about them The values stay the same for current holders and therefore it’s nothing to shout about. BULLSH*T. The thing that changes is perception, affordability and a decades long track record of big gains for investors.
As I said, splits were immensely popular in the 90’s. Tech companies were growing like weeds, and they’d split their stock and within 9, 10, 15 months it would be right back to where they were when they split. DELL was famous for it. They’d climb to say 100 bucks a share, and announce a 2 for 1. So the stock opens on exercise day at 50. People would pour into it and sure enough, not even a year later it would be back to 100. They did this no less than 7 times in a short time span.
So, while the market cap remains the same, and shareholders value is the same, there’s some magic behind the mechanics of a stock split. First, when the split is announced, the stock usually starts climbing higher. Then after the split actually happens, it is common for it to wander aimless for a bit, maybe even slightly selling off. But then the very forces that made the stock super expensive to start with, exert themselves and the stock starts rising.
In fact, if you do enough research on splits historically, you’ll find something quite amazing. IF the company is good and solid that’s splitting ( and usually they are, no one splits their 10 dollar stock) history shows that within 18 to 24 months the stock is back to it’s pre split price, 83% of the time!! Now you go tell me splits mean nothing, like TV tells you. Baloney.
Think about this for a minute folks. TSLA is doing a 5 for 1. So, if you own 100 shares of TSLA, you’re going to have 500 shares on execution day. Now, let’s suppose TSLA is 2000 dollars on the close before the split. It will open that Monday at 400 bucks. You can bet that a zillion people that wanted to buy TSLA but couldn’t justify the price tag, will be hopping in on that.
Then we have AAPL. It’s doing a 4 for 1 split. So, using today’s numbers, if you have 10 shares of AAPL at 498 bucks, you would have 40 shares at 124.50. Think of the amount of people that will want to buy AAPL at 124.50 and hope it goes back to 500. LOTS of them will.
This is why I have bemoaned the lack of stock splits. It’s GREAT for the average investor. So, where’d they go? In the 90’s we’d have hundreds of them in a year. Why the dearth of them over the last decade? Well it’s simple. They didn’t have to. With the Feds supplying Wall Street with free money and zero rates, high prices were not a barrier to them. They bought at what ever price, they didn’t care. Their money was basically free.
Maybe, just maybe this duo of splits will get other companies to split. NFLX, NVDA, MSFT, etc. Because if this catches on, the market is going to get very busy. Volumes will explode higher. People will pile into these names at the cheaper prices, hoping to ride it to glory as it returns to it’s pre-split price.
So, how do you play it? Well, there’s a couple ways. As you can see what’s happened to the price of these two since they announced the split, jumping in on the announcement is still pretty strong. Then when the split actually happens, you can 1) buy the stock on any dips it might make after the split, or 2) buy long dated call options on it, or 3) you can try and get the stock even cheaper by selling naked puts on it after the split.
Speaking of options, evidently many of you don’t know that along with our daily “insiders Club” where we look for short term trades Monday through Friday in “real time,” we have a long term holds service we call Horizons. In it, we do a lot of covered calls, we do some straight call buying, we do some stock buying for dividend income. It’s into its second year since we launched it, and I’m pretty happy with the way things have gone.
If you’d like to try out that service, send me an Email at email@example.com and say ‘sign me up” or something. It’s 150 bucks for the year, and it comes out on Sunday evenings. There isn’t an issue every Sunday, as sometimes there’s nothing attractive, or we’re waiting on some covered calls to expire, or maybe I just don’t have much to say. But for the most part there’s an issue just about every Sunday. I’ll send you an invoice via authorize.net and get you set up.
We will be playing these splits in Horizons for sure, so it might be a good time to hop on board. As I said this is NOT for short term trades like the Insiders. We’re in some of this stuff since the first letter in January of 2019.
Have a great day and a wonderful week!
Don’t Underestimate This
I know, I know, I’m supposed to write about markets and gold and making money and yada yada. But trust me, none of that matters if what I see coming down the pike keeps escalating.
Over a year ago, I said this country was going to be in a civil war. We’re in the beginning stages of that war right now. You might think the 60+ days rioting and looting in Portland and the rioting/looting we’ve seen in Detroit and Chicago is just going to simmer down. Go away. Return to normal. It is NOT.
The latest issue of our free newsletter is up and this week we're just chatting about "living your life". I'm on record as having said many times that I think a global economic reset is going to take place. "Debts that can't be paid...won't be" comes to mind. So should we just live in caves and in fear? Or should we go to work, do the best we can and enjoy our friends and family?
In our view, you have to live life like nothing's going to happen, but do a little "prepping" that could get you through a short period of turmoil. Everyone should have the wherewithal to get through 2 - 3 weeks of a really bad situation.
So, take a read, it's free!