Editor's Note: Bank of America data shows that the stock prices of companies that have been divested since 1980 have risen by an average of 25% after a year; Tesla has risen more than 8% since the announcement of the stock split plan on March 28; NVR, BKNG, NOW and others may be expected to split their shares >>
Author: Travis
A recent bank of America research report showed that stocks generally outperform the broader market after a spin-off, whether it's a 3-month, 6-month or 1-month period. Since 1980, the shares of companies that have undergone stock splits have risen by an average of 25% after one year, while the S&P 500 $SPX has risen by about 9% over the same period, as shown in the chart below.
There are also some recent examples that can also partially reflect the impact of stock splits on stock prices:
Tesla $TSLA announced plans to split its shares before market hours on March 28, and since then the stock has risen more than 8%, compared with the NASDAQ's $IXIC up nearly 2% over the same period.
Amazon $AMZN announced on March 9 that it would perform a 1-to-20 on June 3, and the stock has since risen nearly 20%.
Quotes source: Huasheng Securities
First, why does the company's stock price rise after the stock split?
Usually, there are two reasons why stocks stand out after a split:
1. Investors see the stock split as a sign of management confidence, and stocks backed by bullish momentum are more likely to spin up, which usually originates within the company.
"The share prices of companies that announce splits are usually outstanding and have some continuity." Bank of America said in the report that "the fundamental strength of the company is the main factor driving the price increase." ”
2. A split can lower the investment threshold and make it easier for more investors to access stocks, thereby increasing liquidity, which Amazon has previously acknowledged when announcing the split. At current prices, the split will fall from $3326 per share to about $166.
In fact, there are many measures to promote liquidity in the market. According to sources, even the conservative Vanguard investment management company (Vanguard) will soon announce support for Partial Share Purchases transactions to lower the investment threshold and enhance liquidity.
Second, consumer discretionary stocks rose by an average of 38% in one year after the stock split
Bank of America's study also showed that stocks in the consumer discretionary, technology and healthcare sectors ranked among the top three in terms of average performance in the year after the stock split, with an average increase of 38% for consumer discretionary targets and 26% for healthcare targets. Perhaps because these industries generally grow faster.
Unfortunately, in recent years, the phenomenon of stock splitting has become less and less frequent. Bank of America data shows that S&P 500 constituents have only announced 28 stock splits in the past five years, compared with 346 between 1996 and 2000.
But that could change. Bank of America analyst Justin Post said the recent announcements by well-known companies such as Amazon, Alphabet and Tesla after the split could incentivize other companies and trigger a wave of stock splits. Since a split attracts capital inflows and supports the stock price, it may be more beneficial to the business than to a more costly share buyback.
3. 5 targets that may be split in the future
Marketwatch's Michael Brush pointed out that the following 5 companies are also likely to announce stock splits in the future, all of which have higher stock prices and better revenue growth, and have all received "buy" ratings from Bank of America.
1.NVR
NVR $NVR is one of the largest homebuilders in the United States, and the company also has mortgage banking and property services businesses. The company's revenue rose 19 percent to $8.95 billion and net profit rose 37 percent to $1.24 billion last year. Brush believes that although the Fed will speed up interest rate hikes, the market demand for housing should remain strong due to factors such as supply shortages. The current price of NVR is $4672.05.
Source: Huasheng Securities
2.Booking Holdings
Booking Holdings $BKNG is an online travel service that offers services such as booking flights, hotels and car rentals. Its operating brands include Booking.com, Priceline, Agoda, Rentalcars.com, Kayak and OpenTable.
The company's travel-related bookings increased 160 percent year-over-year to $19 billion in Q4 last year, and total revenue increased 141 percent from a year earlier to $3 billion, with net income per share of $14.94, compared to a net loss of $4.02 per share in the year-ago quarter. Booking is currently priced at $2348.45 and Bank of America has a price target of $3100.
3.TransDigm
TransDigm $TDG is a company that designs and sells proprietary aircraft components to aircraft manufacturers and airlines, and its main business has a fairly stable demand. TransDigm typically sells high-margin specialized components such as motors, batteries, power controls and cockpit systems.
The company's sales in the first quarter of this year increased 8% year-on-year to $1.2 billion. Net income increased 226% year-over-year to $163 million and earnings per share were $1.96, compared to a loss of 42 cents per share for the year-ago quarter. TransDigm is now priced at $651.54 and Bank of America has a price target of $790.
4. Lin's research
Lin Research $LRCX provide wafer fabrication equipment and related services to the semiconductor industry. Its products can help chipmakers make better-performing smartphones, computers, servers and cars.
The company previously reported Q4 sales down 2 percent to $4.23 billion, and diluted earnings per share rose just 2 percent to $8.44. Like most companies in the chip sector, this company has been hit by supply chain problems.
The company's executives have previously shown optimism: "We expect wafer manufacturing equipment investment to increase again in 2022, which will lead to another strong growth year for the company," Tim Archer, CEO of Lin Research, said in an earnings release in January. The stock is now priced at $537.61.
5. Now serve
Now serving $NOW the company's Now Platforms helps companies, universities and governments work more efficiently by digitizing workflows.
The company's sales rose 29 percent year-over-year to $5.9 billion, but earnings per share rose just 2.5 percent to $6.07 as the company continued to invest in expanding its business. The company believes its annual sales will increase by at least 20.5% annually over the next five years and reach more than $15 billion by 2026. The stock is currently priced at $556.89 and Bank of America has a price target of $680.
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