Should You Buy Stock Splits?

We’ve seen many notable splits in recent years, with companies aiming to increase liquidity within shares and erase barriers to entry for potential investors.

Lower share prices are more affordable for a greater portion of investors, although it’s worth noting that the rise of fractional share investing offered by many brokerages has alleviated this issue for some.

But why shouldn’t investors buy blindly into a split? Let’s take a closer look.

Splits are Just Cosmetic Changes

It’s vital to know that splits are purely cosmetic changes that do not affect a company's valuation. Splits increase the number of shares outstanding while reducing the share price proportionally, which leaves market caps unchanged.

The underlying business fundamentals also remain the exact same, with its financial health remaining unaltered. Splits shouldn’t be seen as buy signals but rather as a reflection of underlying company strength. For example, splits are commonly announced when share prices become ‘steep,’ which implies strong underlying buying pressure for shares overall.

Rather, investors should focus on other aspects that truly drive share prices higher, including positive earnings estimate revisions, better-than-expected quarterly results, and strong sales growth. 

Recent Splits

Interactive Brokers IBKR recently underwent a 4-for-1 split on June 18^th, with shares well in the green since.

Pegasystems PEGA underwent a 2-for-1 split on June 23^rd, with shares up nicely since the split date.

Both companies have benefited primarily from strong quarterly results, with the positivity not necessarily concerning the splits.

Bottom Line

Splits are generally covered in positivity, as they allow a greater portion of investors to get in. While it’s a positive development, it’s critical to realize that splits aren’t an explicit buy signal, as investors should instead focus on underlying business fundamentals.

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This article originally published on Zacks Investment Research (zacks.com).

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