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Thursday, June 09, 2022
Alphabet’s share price soon to be 3 Digits! Is this an Opportunity?
* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.
* Past performance doesn't guarantee future returns.
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Seeing Amazon's quote in 3-digits was diffcult to digest for several investors as the company started the week with a price of $122. Well, that was because the 20-for-1 stock split came into effect.
Yes, stock splits are back in vogue, and the market has been rewarding investors for companies that split their shares. After Apple and Tesla started the party in the summer of 2020, NVIDIA came aboard in 2021 and Amazon was the latest technology giant to split its stock. Next on the list is Alphabet which will follow on the lines of Amazon and split its stocks in the ratio of 20:1 on July 15, 2022.
Why do markets often reward stock splits?
Although stock splits don't alter the fundamentals, they have been perceived as a shareholder friendly move as a lower price per share makes share ownership more to a broader range of investors. While the logic of lower price is much less relevant in today's market as most brokerages allow investors to own fractions of individual stocks, it still holds significance in the world of options. Options change hands in lots of 100, so contracts on a high-priced stock can be expensive.
A stock split generally indicates executive-level confidence in the prospect of a company. Management is indicating that it expects the shares to continue rising after the division, and the market likes to see these bullish insiders.
Besides, post-20-to-1 split, a stock price that fluctuates 50 cents in a day, rather than $10, may imply more stability to investors. So, in the near run, a stock split can often boost a stock's price, although that's pulling ahead expected outperformance.
The latest example of this is Amazon, which announced its first stock split since the dot-com boom. Shares of the e-commerce giant rallied 15% in the month prior to the split, while it gained 2% on the first day of trading following a 20-for-1 stock split.
If history is any indication, stock splits tend to boost stocks. History shows stock splits produce outperformance — both before the split and for up to a year.
As can be seen below, the market rewarded all the above-mentioned companies — both before and after the split.
Stock performance before and after the split.
According to a recent study, since 1980, S & p 500 companies that have announced stock splits have significantly outperformed the index three-, six-, and 12 months after the initial announcement. Shares of firms who split gained 25% a year after the split, compared to 9% for the broader market
While it remains to be seen if Amazon continues its climb in the year ahead, next company on the list to split is Alphabet — scheduled to split on July 15.
With 35 days left to the split, investors are eager to see if Alphabet will gain ahead of the split just like its other Tech behemoths or will it give into the recession and rate hike fears.
However, investors should note that past performance doesn’t guarantee future returns. Clients should follow proper risk management as huge volatility is expected around corporate actions. The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Please read the complete disclaimer carefully.
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data & Prices as of: 09/06/2022
Arun Leslie John
Chief Market Analyst
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