Traders, listen up: we’re living in the age of the stock split.
Unless you’ve been living under a rock, you probably heard about Nvidia Corporation’s (NASDAQ: NVDA) highly-publicized 4-to-1 split that took place on July 22.
After the split announcement, NVDA shares surged into a remarkable uptrend, adding 35% in less than three weeks.
NVDA’s rollicking price action was a continuation of recent history. It mirrored similar moves in Apple and Tesla shares after both of those companies announced splits earlier this year.
If you know what to look for, repeatable chart patterns can emerge around stock splits.
Today, let’s look at eight stocks that could be primed for splits.
But first, let’s go over how stock splits work — and why traders should watch them closely.
Table of Contents
- 0.1 What’s a Stock Split?
- 0.1.1 Amazon.com, Inc. (NASDAQ: AMZN)
- 0.1.2 Alphabet Inc. (NASDAQ: GOOG)
- 0.1.3 Chipotle Mexican Grill, Inc. (NYSE: CMG)
- 0.1.4 Boston Beer Company Inc. (NYSE: SAM)
- 0.1.5 Shopify (NASDAQ: SHOP)
- 0.1.6 Mercado Libre, Inc. (NASDAQ: MELI)
- 0.1.7 Booking Holdings Inc. (NASDAQ: BKNG)
- 0.1.8 AutoZone, Inc. (NYSE: AZO)
- 1 The Bottom Line: Why Traders Should Watch for Stock Splits
What’s a Stock Split?
As a company grows larger and its market cap expands, its underlying stock’s share price grows with it. That’s fine until a share price becomes overly expensive (usually around $1,000 per share). When shares cost this much, the high price can serve as a barrier to entry. It dissuades potential investors and traders from buying the stock.
Think about how many retail traders have accounts with a total value between $1,000 and $5,000 … How will they reasonably invest in, say, Amazon? They can only buy a single share.
This is where a stock split could come into play…
There’s a psychological component to share prices. Time and time again, it’s been shown that investors are more likely to buy a stock trading for $500 than a stock trading for $2,500 — even if the market caps are exactly the same.
To account for this, a company may choose to split its stock. In other words, it divides its share price while granting shareholders more shares.
But how does this work in practice? Let’s say last week you owned 100 shares of Stock XYZ at a share price of $1,000. After a 4-to-1 stock split, you’d own 400 shares of XYZ at a share price of $250.
Your actual equity position didn’t change, but the share price is now divided by four. Stock splits allow traders with smaller accounts to start positions in large companies without needing to resort to purchasing fractional shares.
So without further ado, let’s take a look at 8 expensive stocks that could soon split.
Amazon.com, Inc. (NASDAQ: AMZN)
Everything-delivery platform Amazon.com, Inc. (NASDAQ: AMZN) needs no introduction.
It wouldn’t be surprising if you purchased products from the site before finishing this article.
These days, most Americans’ garages look like Amazon logistics centers … Endless arrays of boxes serve as a reminder of the tech company’s dominance.
The revenue numbers don’t disappoint, either. Quarter after quarter, Amazon has consistently topped analyst earnings estimates, proving it’s more than capable of capitalizing on its cornering of the e-commerce delivery market.
But the share price is trading for a whopping $3,638 at writing. It has become increasingly difficult for traders with smaller accounts to even consider starting a position in AMZN.
This is where a stock split could come into play. A split of, for instance, 6-to-1 could bring the share price down to approximately $606. That’s more approachable than its current price.
Plus, social media traders have been circling rumors of an Amazon stock split for several months now. While there’s no official word from the company, you can bet that AMZN’s C-suite is keenly aware of these whispers.
That being said, Amazon is a veritable cash fortress that may have no incentive to draw in new investors. The company has split its stock three times in the past — but not since 1999. That could suggest that traders may have to wait a while for a fourth split.
Alphabet Inc. (NASDAQ: GOOG)
Trillion-dollar tech giant Alphabet Inc. (NASDAQ: GOOG) has only split its stock once in the past when the company created dual classes of stock in 2014. Could another split soon be on the horizon?
In 2014, Google split its stock to create GOOG and GOOGL. The shares have gone on unbelievable runs since then. GOOG is trading at $2,740 at writing (up 80% YTD and 50x higher than its IPO price).
Traders anxiously await Google’s Q2 2021 earnings call scheduled for Tuesday, July 27.
Considering the orders of magnitude Google has added to its market cap (not to mention the incredibly high share price) it seems logical that the company would soon consider splitting the stock again.
Chipotle Mexican Grill, Inc. (NYSE: CMG)
Fast-casual burrito empire Chipotle Mexican Grill, Inc. (NYSE: CMG) is another high share price that could potentially benefit from a stock split.
Chipotle’s remarkable growth story continues to improve with each passing quarter. On July 22, the company smashed Q2 2021 earnings estimates, citing a return-to-demand from restaurant-goers. Additionally, Chipotle said digital sales jumped more than 10%, making up 48.5% of the company’s overall quarterly sales.
The market applauded the strong report with CMG shares surging as much as 11.5% in after-hours trading on Wednesday. The move was further amplified by rapidly increased mentions on WallStreetBets, signaling that retail traders see further upside in the name.
Unlike some other companies on this list, Chipotle has never before split its share price. And as the stock passes the $1,800 mark, there’s certainly an argument for doing so.
Boston Beer Company Inc. (NYSE: SAM)
Alcohol outfit Boston Beer Company Inc. (NYSE: SAM) has seen its share price surge over 400% in the past 18 months, trading for $717.85 at writing.
The legacy beer company caught tailwinds from the exploding hard seltzer market, as it produces one of the most popular beverages in the category, Truly.
However, Boston Beer Company’s Q2 2021 earnings print was a staggering miss, with disappointing Truly sales largely to blame. On a conference call, founder Jim Koch admitted that the company “overestimated the growth of the hard seltzer category in the second quarter and the demand for Truly.”
In hindsight, these results track with the broader earnings narrative in Q2 2021. Consumers are going back to their favorite restaurants and eating in person, which naturally hurts the bottled beverage industry.
Meanwhile, fewer customers are going to big-box retailers and loading an entire cooler full of hard seltzer for the weekend, which many seemed to do regularly throughout the pandemic. This seasonal shift in consumer spending habits led to a less-than-stellar quarter for Boston Beer Company.
But even with the recent slowing growth, SAM shares are still trading north of $700, making SAM a candidate for an impending stock split.
Shopify (NASDAQ: SHOP)
E-commerce king Shopify Inc. (NASDAQ: SHOP) has been the subject of stock split rumors for months.
Shopify has experienced rapid growth from increased online shopping sales during lockdowns, causing shares to surge by nearly 75% in the past year to an eye-popping $1,616.
Unsurprisingly, Q1 2021 earnings destroyed estimates. Analysts were expecting EPS of 75 cents, while SHOP reported a staggering $2.01. If this sort of revenue growth continues in the near term, SHOP shares will become incredibly expensive quickly.
A stock split could make high-flying SHOP shares that much more accessible to retail traders as well as long-term investors.
Mercado Libre, Inc. (NASDAQ: MELI)
Speaking of e-commerce, the “Amazon of South America” Mercado Libre, Inc. (NASDAQ: MELI) is another lofty stock that seems ripe for a split.
Based in Buenos Aires, the Argentinian company rules the region’s online shopping sector with gross merchandise volume accounting for nearly a quarter of all South American e-commerce sales.
The stock reflects this total domination, as MELI shares are up an awe-inspiring 950%+ in the past five years. At the beginning of 2019, MELI was trading for right around $300. At writing, one share costs $1,619.
Splitting the stock would make the individual shares more affordable and could potentially help to draw increased attention from American traders.
Booking Holdings Inc. (NASDAQ: BKNG)
Travel technology company Booking Holdings Inc. (NASDAQ: BKNG) was part of a slew of travel stocks that got absolutely wrecked following the onslaught of the pandemic.
In March 2020, BKNG shares were trading as low as $1,117 (still a high share price). At writing, BKNG had rallied more than 187% off its lows to $2,212 per share.
The macroeconomic conditions seem to be moving in BKNG’s favor as well. The hotel industry has been rebounding at a better-than-expected pace largely due to the COVID-19 vaccine rollout.
The vaccines have been an “incredible boost to travel,” according to Bram Gallagher, senior economist, CBRE Hotels Research. “We were expecting that the second half of the year was going to pick up meaningfully, particularly in leisure travel, and that has been advanced by the way that the vaccine has been distributed so well across the U.S.”
Similar to BKNG, the last stock on the list is also getting a major boost from broader market conditions…
AutoZone, Inc. (NYSE: AZO)
Aftermarket car part retailer AutoZone, Inc. (NYSE: AZO) is another stock catching tailwinds due to recent economic shifts.
Autozone’s bread and butter, the used car market, has been on fire so far in 2021. A recent report from the Department of Labor showed that used car sales rose by more than 10% in June after rising 7.3% in May and 10% in April.
The company also reported solid Q3 2021 results, with EPS of $26.48 up 84% from the prior-year figure of $14.39. Meanwhile, the stock has rallied 36% in the past six months, trading for $1,632 at writing.
Just like with BKNG, the economy is giving AZO a major boost. If the share price keeps ramping towards the $2,000 mark, it seems possible that the used car king could split its shares soon.
The Bottom Line: Why Traders Should Watch for Stock Splits
You might wonder if the actual equity position doesn’t change in a stock split, then why should traders care?
Again, the effect is mostly psychological. Think about dollar stores … They’re successful because shoppers can’t resist a (seemingly) good deal. These stores sell nearly identical products to their grocery store counterparts for considerably cheaper.
This psychology transfers to stocks as well. Traders sometimes treat the stock market like it’s a dollar store, particularly when it comes to stock splits. They may rush out to buy XYZ at $25 when they felt it was too expensive at $100. But they’re buying the same thing.
The trading around stock splits this year has been predictable and many followed similar patterns. This was proven recently in three well-publicized stock splits — Nvidia, Apple, and Tesla. The stocks went on incredible runs on the split announcements. But all three proved to be ‘sell the news’ events as traders sold their shares on the actual day of the splits.
This is why knowing your history is important. If you know what to look for and keep recent events in your immediate memory, stock splits can present incredible trading setups.
Featured cover image: iQoncept/Shutterstock.com