Investors riding high on Apple and Tesla stock splits could get clipped, data shows

The first rule of successful investing is “buy low, sell high.” But anyone planning to apply that time-honored principle following today’s stock splits by Apple and electric carmaker Tesla should reconsider the guidance and its intent.

As much as Apple CEO Tim Cook and Tesla CEO Elon Musk would love for people to snap up shares in their companies now that the post–stock split prices are “lower”—as, indeed, investors did Monday, and for weeks prior—prospective stock-buyers best be wary.

While the companies’ share prices are lower, nominally, the price to own the same percentage of each company as before is not. A stock split is, fundamentally, a cosmetic accounting trick—and buying fractional ownership of these companies is, on a relative basis, more expensive than ever after factoring in recent gains in share price.

All for one and one for all

Apple’s 4-for-1 stock split reduced the company’s share price from about $500 per share to about $125—but quadrupled the number of shares to about 17 billion. Following the split, Apple’s share price climbed as much as 4% to more than $130 per share.

Apple recently became America’s first publicly traded company to surpass a market capitalization of $2 trillion. Its stock price is up 35% since its management announced the stock split on July 30, and it’s up more than 70% since the beginning of the year.

It’s a similar story for Tesla. The automaker’s 5-for-1 stock split dropped the share price from $2,213 to $444—and the share price rose nearly 13% to about $498 per share after the division on Monday. Tesla’s shares already rocketed up more than 80% since the company announced its plans for a split on Aug. 11.

Splitting shares, splitting hairs

Stock splits are a tactic that management teams use to make a company’s shares more attractive to retail investors. Since the move ostensibly lowers the price of a share, more small-time investors can afford them.

For retail investors, the logic behind buying shares solely based on the announcement of a stock split rests on a shaky foundation. In today’s world where stock trading is free across the major brokerages and where anyone can participate in fractional investing (in which people can buy fractions of a share), there’s no reason a high share price should pose a barrier to investing.

The most generous appraisal one can lend a stock split is reading it as a vote of confidence by a company’s board that they believe in the underlying health and future growth prospects of the company. Stock splits tend to draw attention to companies that conduct them—and increased hype can translate into more stock sales.

Short-term pain, long-term gain?

The academic literature on the performance of companies’ post-split stocks is inconclusive.

A well-known study led by David Ikenberry, professor of finance in the business school at the University of Colorado at Boulder, found that most company’s share prices rose in the years following a stock split for the period surveyed, between 1975 and 1990. An earlier influential study found no significant gains for the period between 1927 and 1959.

While Tesla has no history of stock splits—and the possibility that investors will reap a return commensurate with their zealotry defies better judgment—Apple’s stock splits in the past preceded price dips in the weeks that followed.

Apple has split its stock four times since it went public in 1980. On average, the price of Apple’s stock tends to go down in the weeks following a stock split: Selloffs dampened the price by 5.6% two weeks after split, on average, according to data from Kensho, a market analytics company, as CNBC points out.

While there might be some pain in the short term, investments may fare better in the longer term. Another assessment by Ally Invest, an online brokerage, found that Apple generally outperformed the market one year after its stock splits, on average.

Every company and every time period presents a unique moment, so it’s hard to use the past to predict the future. The dotcom bust, which followed Apple’s second-ever stock split in June 2000, wrecked investors’ returns. Economic uncertainty and the devastation caused by COVID-19 could spell trouble ahead too.

A mixed bag

Analysts can’t agree about how to grade Apple.

Some market watchers are bullish about the growth of Apple’s services business, despite antitrust concerns over how it manages its App Store. Apple could benefit from smartphone rival Huawei’s hardships, as the Chinese company struggles to contend with U.S. sanctions.

Eyeing what it believes could be a big year for iPhone upgrades, following the expected debut of the iPhone 12, investment bank Wedbush believes Apple’s stock could hit $150 per share in 12 months.

Others have dimmer expectations. Apple’s share price has already experienced an extraordinary run-up, and Barclays, for one, has marked down its 12-year Apple share price forecast to $100. “We see more downside than upside at these levels,” said Barclays analyst Tim Long in a note.

Uncertainties looming around the upcoming U.S. presidential election in November could hurt stocks in the coming months. Meanwhile, a still-festering pandemic threatens to flare up and cause deeper disruptions worldwide.

Then again, the Fed’s low interest rates could buoy the stock market and tech stocks for the foreseeable future.

The price isn’t right

Because tech stocks have been soaring to new highs lately, investors should have no illusions about the cost of the shares they’re considering buying. The share prices of Apple and Tesla are at all-time highs—buying in now is expensive, at least historically speaking, no matter what the nominal share price says.

The history of Apple stock price movements shows the price could go down, at least in the near-term. It’s one reason why people should think twice before jumping in right now on the basis of a stock split alone.

Before buying Apple or Tesla stock, ask yourself this: If you swapped each dollar bill in your wallet for four quarters, would that change how you valued the money in your pocket? Because that’s effectively all that’s changed with the stock split.

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