Back in the 1990's, stocks would split on a routine basis as a fantastic bull market and the desire to keep stock prices at reasonable levels encouraged splits. Back in those days, stocks that split typically had a big run prior to splitting as investors didn't seem to understand the concept.
Stock Split Definition
Definition of a stock split from Investopia:
A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.
Fast forward to the 2000's and most stocks appear to have gravitated towards the mindset that stock splits were part of the reasoning for the stock market bubble back in 2000. In essence, stock splits became synonymous with a company attempting to push it's stock price higher.
Race To $1,000
Recently several media outlets have had informal competitions for which stock would hit $1,000 first whether Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), or possibly even Priceline.com (NASDAQ:PCLN). All three stocks already trade over $500. While interesting conversation pieces, the price of a stock honestly doesn't have anything to do with value whether back in the stock split era or the let it ride era.
On several occasions, Stone Fox Capital has suggested that possibly Apple should split the stock maybe even three-to-one to make it easier for investors to buy the stock. It along with Google both trade at relatively low valuations and possibly the high stock price is limiting buyers.
While most investors don't see it as problematic, the stock price of Apple clearly impacts my models at Covestor. For a small portfolio of even $10K, it becomes problematic to buy a $600 stock. If an investor wants a 7.5% position the only option is one share that equates to 6% or two shares that equates to 12%. Just imagine if you want less than a 5% position, it won't work out. Naturally this is on a small scale, but high stock prices can clearly impact investment selections.
Under Armour Announces Split
This brings us to the main point of the Under Armour (NYSE:UA) stock split announced back on June 11th. The stock sits at the 52 week high around $105 and has a very high PEG ratio over 2. With the stock recently soaring above $100, it becomes one of the high flying stocks that faces the dilemma of splitting the stock.
Ideally a stock over $100 probably ought to be split especially with a trading system that doesn't always encourage odd lots and particularly partial shares. The one catch with Under Armour is that it trades at a very lofty valuation meaning that any quick drop of the stock by say 20% would quickly push the post split stock down to $40. While still an acceptable level, it quickly gets away from the ideal stock price range if it drops much farther.
With limited stock splits in the past 5 years, Under Armour will be a test of whether the old process of running up the stock prior to a split continues. Such a move especially if the stock quickly runs to $120 could make this stock an ultimate short candidate on the split day expected around July 9th.
Last Friday, Cramer discussed the stock on Mad Money quickly pointing out the high valuation and debating a couple of analyst opinions. Interesting though, he never discussed the stock split.
Recent high flyer Oneok (NYSE:OKE) completed a two-for-one stock split on June 1st. The stock actually bottomed right after that so maybe it just doesn't have an impact these days. Although, the stock spent the previous month down some 10% so it might not provide the ideal comparison.
Ultimately the key to investing especially in the short term is finding a catalyst that could signal a turning point. The stock split could just provide that pivot on Under Armour. If the stock soars into the split date, investors should look to unload it and possibly even go short.
Recent history suggests the hype won't occur like in the past, but investors should keep an eye on the stock just in case. Especially considering Under Armour is the last of the $100+ stocks that should be splitting.
Additional disclosure: Please consult your financial advisor before making any investment decisions.