What Stock Splits Tell Investors

Ever wondered which stocks split most often? Stock splits generally occur as a result of a positive trending stock price that goes to levels that shut out investors with less trading capital. The objective is to increase the float and liquidity of a stock, thereby making 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. But that was then. Since the tech bubble in early 2000, the shares of Cisco have struggled, basing at around $20.00. Cisco has not split since March 23, 2000, and, based on the current price action, the next split could be years away.

 Stocks that split often 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. Now, you be considering market leader Electronic Arts, Inc. (NASDAQ/ERTS) when looking at the videogame sector, 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 four times since November 2001… and last Wednesday it announced that it would again split its shares on a four-for-three basis. That would be five splits since 2000! As far as I’m concerned, that shows a strong price trend and strong momentum.

Advertisement

 Robert A. Kotick, Chairman and Chief Executive Officer of Activision, said the upcoming split on October 24 (to shareholders of record on October 10) will gain the company a “broader range of investors” and “improve the market liquidity.”

 In my view, Activision deserves the attention. It is consistently profitable and has beaten earnings estimates in the last nine straight quarters. The balance sheet is strong, with good working capital, about $786 million, or $3.86 per share, in cash, and no debt.

 Growth in the FY06 is a concern, but Activision expects to release new versions of top sellers “Tony Hawk,” “Spider-Man,” “Shrek,” “Call of Duty,” “DOOM,” and “X-Men” in 2006. Others in the works include “The Fantastic Four” and “Madagascar.”

 Trading at 23.80x its FY07 and a PEG of 1.27, the shares are cheaper than those of Electronic Arts, which trade at a higher 30.90x its FY07 and a PEG of 2.04.

 So, you may like Electronic Arts, but the frequency of the stock splits tells another story.