One thing that generally gets us smiling is when we have a mess of good companies doing splits when the overall market tone stinks. Why? Well think about it for a minute. If XYZ announces that they are going to do a 2 for 1 split and the stock is at 100, it stands to reason that they will be trading in the 50's in the near future. But, if before the split comes, the market beats XYZ down to 70 dollars, that means the stock will be in the 30's after the split. So, why the excitement? Let's look. Splits are interesting creatures and entire books have been written about them. The things that have attracted us to them is that there are repeatable patterns that are generally displayed when a stock splits. First, unless the market is sour, the stock will generally "run up into " its split. But, maybe more importantly, history shows that a "good company" will generally retrace back to its pre split price within about 12 to 18 months, with some doing it as soon as just 3 or 4 months. Think about the stunning pattern of splitting and running up, splitting and running up that great companies have done. Well we have an interesting thing happening the market is doing 2 for 1 splits for companies and the company still has one coming! What makes it even better is this. As traders are selling stock in a sell off, they are building a cash reserve for when things get "better". With a lot of cash on hand and when some really good companies are at post split prices that are "beaten down" to boot, you can bet a lot of that cash will make its way into those stocks. So the point is, use sell offs to really look at the stocks that just split and are going to split. Good companies that have taken a beating are doing 2 for 1's and 3 for 1's and they are going to be very good places to have parked some money once the market rights itself. Usually there isn't much good you can say about a market sell off, but when you have a month with many companies splitting, at least we can use the weakness to our advantage. Wait for the selling to stop and take a nibble on some of the post splitters. You might be pleasantly rewarded. |
