![]() ![]() The first was only a couple of short years after their 2002 IPO, when they underwent a 2 for 1 stock split in 2004. NFLX has done a stock split before, in fact they've split their stock twice. And that's a self-fulfilling prophesy if the split causes demand for the stock to go up. Finally, they can be a near-term catalyst simply because investors think it's a catalyst. It can also have an effect on liquidity in the option market for a firm, as the lower stock price makes 100 share lots (which is the minimum for options) accessible to more investors. While a stock split doesn't change the inherent value of the underlying firm, some investors look at stock splits as a sign of management confidence in the business. The streaming service Netflix ( NASDAQ: NFLX) is ubiquitous, but investors sometimes have less knowledge about its history of splitting its stock. Time and time again this behavior occurs.Photo by GoodLifeStudio/iStock Unreleased via Getty Images This is exactly what William O'Neil warned about and can be visually seen in the prior examples. Pay attention to what happens in each phase, especially the post split row. There is the pre announcement phase, but I have disregarded that as most people become aware of the stock when the split announcement occurs. They actually had value to the long-term shareholder.īelow, I have included a table of the phases. So, stock splits are not just smoke and mirrors. Many investors, especially the smaller ones, buy after the split because they feel they are getting a lower price, and this tends to drive the price of the post-split stock higher.The synergy of these events can drive the price of the stock up even more. Companies will often report high earnings and raise dividends at the same time they announce a stock split.It's mostly boils down to perception and psychology which manifests themselves physically. Why does this behavior occur? There are a couple of reasons. This is over a one- to three-year period. In essence, for a similarly sized company, a stock performs better post-split than if it hadn't not split at all. His study debunked a lot of myths regarding stock splits. Now, let me direct you to a study performed by David Ikenberry of UIUC. After the split there was a minor sell off, then a steady increase in price. Prior to the split there was a run up in Under Armour's stock price. Take a look at the stock price pre and post stock split. In fact, it was in consolidation of a couple of weeks before slowly rising.Īnother company is Under Armour ( UA ). The stock did not rise quickly as most would believe. Prior to the split, the stock had a rapid rise. Let's look at a recent stock split that is still fresh in everyone's mind, Apple ( AAPL). I believe his words are still wise and applicable to all stock splitting scenarios. Though he mentions it for constant stock splits. In fact, the big players and institutions such as mutual funds may be using this opportunity to sell off. In addition, William O'Neil of investors business daily has noted that investors should be alert if excessive stock splits come after huge price advances. According to a passage from the book, Stock Market Logic: a Sophisticated Approach to Profits on Wall Street, "one of the great popular myths on the Street is that stock splits are usually followed by dynamic upside price movements." It is better to wait and be patient because price will not immediately take off and leave you behind. Had you entered into a position in Netflix's stock, you would have most likely been frustrated. What does this image show us? It shows us that the hype of the split ran the price of the stock up. The image above is NetFlix's first stock split. I will take a look at Netflix's previous split and a few of the companies and the typical behavior that occurs before the split and after the split. The small investor can finally buy the stock at an affordable price. The Netflix ( NASDAQ: NFLX) announcement made me be happy. ![]()
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