April 25, 2012, 12:48 p.m. EDT
By Jeff Reeves
Don't ask my why investors bid up shares of a company after a stock split. But many times they just do.
That's why you might want to have capital clear this summer for a swing trade in Coca-Cola. Start looking for a down day to buy into shares before it executes its 2-for-1 Coke stock split in August, pending approval.
Why? History tells me so.
In January 2010, Warren Buffett's iconic Berkshire Hathaway split its "baby B shares" 50-for-1 to bring them down from $3,500 per share to around $70. In the first 30 minutes of trading after the split, B shares of Berkshire leaped 5%.
In May 2010, Chinese Internet stock Baidu split 10-to-1 to bring its shares down to earth from the $600 level. Forgetting the "drop" in share prices due to the split, the value of Baidu shares jumped 8% on no news.
Oh, and I guess its worth pointing out that the last time Coke split 2-for-1 in 1996, shares popped 2.5% in the first day of trading and ran up 13% across the next 10 trading days. A year later, it was up about 40%, doubling the return of the broader Dow Jones.
A lot of the time when a big stock with a big brand splits, it pops. Maybe it's because investors didn't pay attention to the news and think they are buying a dip. Maybe it's because some computer trading isn't adjusted and triggers a buy for the same reason. Maybe it's because smaller investors afraid of high-priced stocks are finally enticed into buying.
Honestly, I have no idea why it happens — the point is that it frequently does .
Let me be crystal clear: A stock split doesn't change a thing other than divide the share price in two and double the shares outstanding. Coke will go from almost $80 per share to almost $40 per share, and the number of shares on the market will increase from roughly 2.26 billion to 4.52 billion.
If you have 100 shares of Coke at $80 worth $8,000, after the split you will have 200 shares of Coke at $40 -- still worth $8,000.
That's it. Profits won't change. Revenue won't change. The price of Coke at the grocery store won't change. The budget for advertising won't change.
But for some reason, stocks usually pop after a split.
The splits rule isn't bulletproof, of course. Smaller stocks like cosmetics queen Estee Lauder (NYSE: EL ), retailer TJX Companies (NYSE: TJX ) and energy drink giant Monster Beverage (NASDAQ: MNST ) all split 2-for-1 earlier in 2012 — and TJX tallied a mere 1% gain after the move while Estee Lauder and Monster both notched a tiny loss in the first day after the stocks executed splits.
Of course, all those stocks also have outperformed the market dramatically in the past few months since their splits.
- EL is up 10% since its Jan. 23 split, while the Dow is up just 3%.
- TJX is up 18% since Feb. 9, while the Dow is up less than 2%.
- Monster is up 18% since its Feb. 16 split, while the Dow is up just 2%.
You could do worse than own Coke right now -- even if it doesn't see the pop tied to a split. This is just one more reason to pop the top on this stock, though.
Link: http://www.marketwat...4-25?link=kiosk
