With the recent Starbucks (NASDAQ:SBUX) announcement that it will be splitting its stock on a 2-for-1 basis, a lot of investors are thinking of buying other stocks that have a strong possibility of splitting. It’s always a good idea to buy a company’s shares before it announces that it would be splitting its stock. This is the optimal time to buy such a company. Why? The moment a company announces that it will be splitting its shares, the market will price this into the stock price. In other words, the stock will appreciate in the weeks or days before the announcement so by the time the announcement drops, there is really not much upward potential when you buy the stock.
For example, a stock is trading at 100, and a lot of market traders think that the stock will be splitting 2-for-1. Due to the rumors and due to the market expectations, the stock doubles in size to 200 over a few weeks. Not surprisingly, in line with market expectations, the company announces that it will be splitting 2-for-1. If you buy in at the time it reached 200, you basically just bought the stock at its regular price of 100 per share because it’s going to split 2-for-1. I hope you see the logic here.
If you truly want to play the stock split valuation game properly, you need to be proactive in looking for companies that have a strong possibility of splitting. Here are the key signals to look for.
First, look for a company that has been splitting regularly. This is definitely the case with Starbucks. This recent split announcement is its sixth 2-for-1 stock split announcement since going public.
Second, look for a high stock price. If the company is worth over $100 per share, that may be a good company for stock split purposes.
Third, look for healthy companies. These are companies that are producing regular increases in profitability and sales volume. Normally, companies that are sick or going through tough times are not going to be issuing stock split announcements. They have bigger problems to solve.
Fourth, look for a lot of cash. Companies with a lot of cash in the balance sheet are in a better position to announce stock splits.
Fifth, look for companies that have relatively small or have a manageable size as far as stock float is concerned.
Put all these factors together and you should be able to pinpoint several stocks that are prime candidates for splits. Buy them before they make the announcement so you can zero in on some quick gains.
