It's All About The Benjamins

Earlier this year, Howard Silverblatt of Standard & Poor's issued a research report which found that stock splits in 2006 were well below the historical average.  In fact, that trend has been in place throughout this current bull market, as stock splits in each year of the bull market have been below the long term average.  Overall, the average annual number of splits since 2002 is 29.6 versus an average of 58 per year since 1980.

One of the consequences of this reluctance to split stocks is that there now seems to be an abundance of issues trading above the century mark.  With cash being as plentiful as it is, managers and investors are gravitating to these names to get money invested.  Is it a strategy you should be following though?

To test this, we created an index of all S&P 500 names trading above $100 per share.  Starting on May 3rd, 2006 we included every stock with a price greater than $100 per share.  These names remained in the index regardless of whether they traded back below $100 per share or split their stock.  Additionally, over the course of the year, if a stock closed above $100 per share, it was added to our index.  Like a tenured teacher, once a stock is in the index, it was not removed unless it stopped trading.  Phelps Dodge (PD) would be an example of a stock added mid year as it closed above the century mark for the first time in late 2006.  PD also serves as an example of a stock being removed from the index.   On 3/19, its merger with Freeport McMoran was finalized.

After one year of trading, it appears as though the strategy of buying $100 stocks works, as the index has outperformed the S&P 500 by over 500 basis points (+20.5% vs +15.4%).  Now, we realize it has only been a year, but it will be interesting to see how this index performs over time and see if different market environments have different impacts.

 

Comments

[Steven]

Saw you mentioned about this in Barron's this weekend. Congrats.