This ‘Divide and Conquer’ Investing Strategy Can Lead You to Stock-Market Winners
Every time a company announces a stock split, some analysts often point out that splits make no difference, as key metrics like earnings also get split along with the shares. It’s akin to serving the same pizza in smaller slices. However, such critics overlook a significant trend: stock splits matter because they tend to result in substantial outperformance in the stock market. According to researchers at Bank of America, stocks that undergo a split achieve average returns of about 25% one year later, compared to just 12% for the broader S&P 500.
With stock splits on the rise following a decade-long lull, understanding their impact is increasingly essential. Last year alone saw 17 stock splits, the most since 2013. Major companies like Nvidia (NVDA), Broadcom (AVGO), Walmart (WMT), and Chipotle (CMG) were among those that split their stocks. Furthermore, stocks that split in 2024 had an average price increase of 17% within just six months, marking an uptick in stock-split outperformance.
Why Does the ‘Divide and Conquer’ Strategy Work?
Portfolio managers and strategists point to several reasons behind this observed outperformance of stocks after a split:
1. Increased Attractiveness to Retail Investors
One prevailing theory is that lower stock prices make shares more appealing to retail investors. David Wagner, a portfolio manager at Aptus Capital Advisors, suggests that stock splits likely lead to higher retail investment flows. Although many brokerage accounts now allow the purchase of fractional shares, the emotional connection of a lower stock price remains significant. John Buckingham, editor of the Prudent Speculator stock newsletter, asserts that positive news and investor enthusiasm can drive stock prices up, which is exactly what splits often symbolize.
Additionally, splits may enhance the likelihood of a company being included in the Dow Jones Industrial Average (DJIA), which can further boost share performance. As a price-weighted index, high-priced stocks are often excluded, but a stock split can open the door for inclusion, as seen with Apple (AAPL), Amazon (AMZN), and Nvidia.
2. Momentum Plays
Stock splits can also serve as a signal of momentum. Popularized by investment legend Martin Zweig, the “momentum investing” strategy suggests that stocks on the rise will continue to do so. Stock splits often imply that a company’s share price has increased significantly, placing these stocks in the momentum investing category. Buckingham argues, “Things in motion tend to stay in motion,” making splits attractive for momentum investors seeking profitable entry points.
3. Practical Benefits of Stock Splits
Splits also tend to decrease the bid-ask spread, increase liquidity, and reduce volatility, making stocks easier to buy and own. A comprehensive study by Nasdaq concluded that splits resulted in a 22% improvement in bid-ask spreads, an 18% increase in trading volume, and a slight decrease in volatility by 3%.
Potential Stock-Split Candidates
Investors looking for potential stock-split candidates might consider these high-performing stocks:
1. Goldman Sachs Group (GS)
Goldman Sachs currently trades near $670, experiencing over a 65% gain in the past year. Buckingham believes the company is due for a split, especially following extraordinary earnings that surpassed Wall Street expectations.
2. Meta Platforms (META)
Meta’s stock trades at around $700 with a 50% rise in value over the past year. Buckingham notes that Meta’s solid performance, largely attributed to advancements in AI, positions it well—split or no split.
3. BlackRock (BLK)
With a share price of approximately $985 and a 74% gain in five years, BlackRock represents a strong candidate for a split. Buckingham suggests that the company’s strong positioning will yield significant growth, especially if market conditions remain favorable.
4. Netflix (NFLX)
Netflix trades at $1,044, having gained 85% in the last year. Despite the high price, the company’s growth strategy, marked by a record number of new subscribers, continues to drive performance.
How to Identify Future Stock-Split Candidates
To find stock-split candidates, focus on stocks trading above $500 with consistent strong performance trends. Jared Woodard from Bank of America’s Research Investment Committee suggests that stocks usually split after a history of robust returns.
By keeping an eye on these trends and understanding the implications of stock splits, investors can strategize effectively and potentially reap significant rewards in the evolving stock market landscape.
