What Stock Splits Can Show You
Wednesday, January 10th, 2007
By George Leong, B.Comm. for Profit Confidential
Ever wondered which stocks split most often? Stock splits generally occur when a positive trending stock price rises to levels that shut out investors who have less trading capital. The objective is to increase the float and liquidity of a stock, and thereby make it accessible to more investors.
Take, for instance, networking powerhouse Cisco Systems Inc. (NASDAQ/CSCO). In its glory days, the stock was on fire as networking became popular amongst investors and Wall Street. In the period from 1990 to 2000, Cisco split its shares on nine occasions. Since the tech bubble in early 2000, the shares of Cisco have struggled, basing at around $20 until the breakout in late July 2006. Cisco has not split since March 23, 2000. Based on the current price action, the next split could be years away.
Stocks that split often can foreshadow a strong bullish price trend. Just take a look at videogame maker Activision Inc. (NASDAQ/ATVI) — the world’s second largest publisher of interactive entertainment software. In the videogame sector, you might have thought to look at market leader Electronic Arts Inc. (NASDAQ/ERTS), but you may want to reconsider.
Take a look at the splits. Since 2000, large-cap Electronic Arts has split its shares on two occasions. Pretty good… but mid-cap Activision has split five times since November 2001, with its most recent split in late 2005. In my view, Activision has a strong price trend and strong momentum. It deserves the attention. It is consistently profitable, and it has beaten earnings estimates in 11 of the past 12 quarters. The balance sheet is strong, with good working capital and about $792 million, or $2.83 per share, in cash.
The company’s growth in the FY08 is expected to be spectacular, coming in at an estimated $1.65 billion, up 42.8% year-over-year. Strong sales and the release of new versions of top-sellers, including “Guitar Hero II,” “Tony Hawk’s Pro Skater 3,” and “X- Men,” helped the company’s bottom line in 2006. Guitar Hero II found itself in the top 10 best-selling titles in the U.S. just 10 months after its initial release, according to The NPD Group.
Trading at 33.65x its FY08, a PEG of 1.68, and 3.47x trailing sales, the stock is cheaper than Electronic Arts, which trades at a higher 40.19x its FY08, a PEG of 2.39, and 5.35x trailing sales
You may like Electronic Arts, but the stock splits tell another story that investors should consider.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
