CEOs, Split your Stocks Already!!
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chipotle Mexican Grill (NYSE: CMG) is a $300 stock. Three hundred dollars! MasterCard (NYSE: MA) is an even higher priced $425 stock. And Apple (NASDAQ: AAPL) … don’t get me started on Apple shares at $620. Hundreds of dollars for a single share of these companies? I'm not buying any of those. These stocks are just too darn expansive. Right?
Well, no, of course not. We all know the dollar amount of the share price says absolutely nothing about if the company is a good investment or not. A $620 share price has zero to do with how expansive the stock is. A $620 stock or a $62 dollar stock, the number makes no difference.
Except it does make a difference and it always has. A $600 stock with a billion shares outstanding sounds and looks more expensive than a $60 with 10 billion shares outstanding. It shouldn’t, but it just does. Mad Money host Jim Cramer would often advise his viewer to take a high-dollar stock and imagine it divided by ten. A $300 stock? Just pretend it is a $30 stock. And that’s not bad advice. Not bad advice at all.
It sounds easy, doesn’t it? Rationally we can all acknowledge that the dollar amount is not important. $20 or $200 -- why would a rational investor care about such a thing? When it comes to investing though, we investors can be fairly irrational sometimes … many times, actually.
Yes, we all like to think that we are completely rational investors. But the fact is that we do irrational things all the time. We buy stocks as they are rising and sell those very same stocks when they are falling. Generally speaking there is nothing rational about that, but it happens all the time. A guaranteed method to lose money that happens over and over again. You can ask us investors to be rational about our investments, but we have shown countless times that we are often incapable of doing that. So why ask us to?
Why not remove one of the barriers that prevent investors from making money? That is what Jim Cramer suggested last week on his program. After years of saying that splits mean nothing, that they are completely cosmetic, Cramer has asked that CEOs should consider doing it for the sake of retail investors. His reasoning for this is fairly simple. On days when a stock makes a huge move to the downside, the loss from a high-dollar amount stock can often be too emotionally jarring for investors.
Priceline.com (NASDAQ: PCLN) has fallen nearly $125 since it reported earnings after the bell on Aug. 7. Chipotle is similarly down more than $100 since it released its earnings report. On the downside, these high-dollar amount declines seem to only exacerbate the problem. Psychologically, a $125 decline seems much worse than a $12.50 decline (even if both declines amount to the same 18% decline). And the argument could certainly be made (which I am doing) that if Priceline, Chipotle and others had done a 10-1 split earlier, they would have never fallen as much as they did to begin with.
Rationally we all know that stock splits should not make one bit of difference. It shouldn’t, but stock splits make shares look cheaper and are generally seen as a bullish indicator by investors. Stock splits are a very shareholder-friendly action and CEOs of high-dollar-amount stocks would do well to enact splits of their own sooner rather than later.
So Apple CEO Tim Cook, Chipotle co-CEOs Ells and Moran, MasterCard CEO Ajay Banga and Priceline.com CEO Jeffery Boyd … please, help an investor out here.
WhichStocksWork has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, MasterCard, and Priceline.com. Motley Fool newsletter services recommend Apple, Chipotle Mexican Grill, and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.