Accretive On: Stock Splits

August 31, 2020

“You better cut the pizza in four pieces because I'm not hungry enough to eat six.”  ~Yogi Berra

Today some pretty high-profile companies with relatively high share prices split their stock.  To some rather new traders and market commentators that is a reason for optimism.  The logic goes something like this; splitting the stock makes the stock more affordable for investors to buy bringing more demand for the shares and higher prices.  The excitement around such an event may drive stock prices in the short term and that logic may be correct for a time or maybe a trade, but it is not a long-term investment thesis.    

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ~ Benjamin Graham

At Accretive, we are long-term investors, not traders.  As investors, we care about what a company is worth over the long run.  In our view, a company’s value is typically derived from the present value of its assets, its future earnings and cash flows, or some combination of those things.  To get an idea of what we think something is worth on a per share basis, we take an estimate of the company’s value as the numerator and the number of shares as the denominator.  A stock split has no impact on the analysis, as both the current stock price and our estimate of fair value is adjusted by the same ratio.    The share count influences our estimate only to the extent a company is issuing or retiring shares. Since a stock split is neither a sale or purchase of shares by the company, we are indifferent to it.  

We believe the excitement over something like a stock split is a sign of the times.  The rather dramatic rebound in the market has bred a new generation of day traders.  These bold traders take to Twitter, Reddit, and TikTok to brag but also to spread the fun and excitement.   Something about this mentality and behavior reminds of an aphorism; “there are old soldiers and there are bold soldiers, but there are very few old, bold soldiers.” We think this could also apply to day traders.

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