Close

How A Stock Split Changes Nothing and Everything At the Same Time (BIDU, BRK.b)

May 12, 2010 4:50 PM EDT
Today's reaction after the 10-for-1 stock split of Baidu.com (Nasdaq: BIDU) helps make a strong argument that stock splits, out of favor since the dotcom crash, should come back. Shares of Baidu.com closed up 9.5% today to $78.21.

In a split, nothing changes fundamentally. In the case of Baidu, instead of 1 share you have 10 shares. The company still has the same sales, the same earnings prospects, the same everything, except share count. As an example, if you had an apple and sliced it into for quarters, instead of one piece you would have four pieces but the four pieces still represent the whole apple.

But take logic out of the picture and what you have is a stock that was at $714.20 pre-split and $71.42 post-split. Now matter how stellar the prospects of a company are, some retail investors simply won't put out $700 for a stock. It would cost $7000 to buy 10 shares at $700, but with shares at $70 you can buy 100 shares for that same $7000.

Today retail investors are bidding up Baidu because they want in on the amazing opportunity of China search engine growth, which Baidu is now the only major player in now that Google (Nasdaq: GOOG) is out. They refused to buy the stock at $700, but at $70 they want it.

Baidu has not been the only beneficiary of a stock split recently. Warren Buffett's Bershire Hathaway (NYSE: BRK.b) had to split the Class B shares (NYSE: BRK.b) to complete the acquisition of Burlington Northern. Buffett's who is the king of 'no stock splits' had to split the B shares 50-to-1.

After the split in BRK.b, the stock went from $3,400 to $67 per share. Logical or not, following the split, investors pushed the stock up as high as $83.57. It has settled down to $78. Since the split the stock is up 12% versus a 3% move higher in the S&P 500.

Not only has stock performance been better, but volume has also been considerably higher. Yesterday, Baidu traded 2.1 million shares pre-split - today it traded 41.5 million shares.

In March, we highlighted Baidu as a great candidate for a stock split. Others that were on that list that have not completed stock splits yet are: Google Inc. (Nasdaq: GOOG), Apple (Nasdaq: AAPL), Intuitive Surgical, Inc. (Nasdaq: ISRG), CME Group Inc. (NYSE: CME), Mastercard Incorporated (NYSE: MA), Goldman Sachs Group Inc. (NYSE: GS), priceline.com Incorporated (Nasdaq: PCLN), BlackRock, Inc. (NYSE: BLK), International Business Machines Corp. (NYSE: IBM).

After all is said and done, a company should be valued based on its earnings, cash flow and other financial metrics - but until then, stocks will trade on hope, speculation and fear of missing out.

We have now seen numerous scenarios where a stock split has helped the stock of the company involved. As we said before "It's Time To Bring Back Stock Splits."

Market Moving News and Intelligence - Free Trial
http://www.streetinsider.com/premium_content.php

You May Also Be Interested In





Related Categories

Insiders' Blog, Stock Splits, Trader Talk

Related Entities

Warren Buffett, Standard & Poor's