| PROSPERITY PUB MARKET TALK
When Stock Splits Go Bad
With some high-profile stock splits happening this year — including AVGO's upcoming 10-for-1 split, we sat down with Jack Carter to talk stock splits... and he gave us some interesting info.
One of the most critical points Jack emphasized was the distinction between regular stock splits and reverse stock splits.
While regular splits can be a positive sign for a company’s stock, making shares of a stock that is rising in price more accessible to a broader range of investors, reverse splits often signal trouble.
A reverse stock split usually happens when a company’s stock has gone down in price enough to turn it into a penny stock — or close to it. By doing a reverse stock split, a company reduces the number of its outstanding shares and increases the stock price proportionally.
For example, in a 1-for-10 reverse split, every ten shares of a company are consolidated into one share, and the price of each share is multiplied by ten.
Companies usually do this to keep a stock from being delisted from an exchange, such as the Nasdaq, where there are minimum price requirements.
Why Reverse Splits Are Often a Red Flag
Jack pointed out that reverse splits are generally a desperation move, a last-ditch effort to maintain listing requirements.
"I can't remember a situation where I’ve seen a stock do a reverse split and it went on to become a good stock," Jack tells us.
Companies that resort to reverse splits often face underlying financial issues that a simple stock price adjustment can’t fix.
He warned that while the reverse split might temporarily prop up the stock price, it doesn’t solve the fundamental problems the company has.
Another myth Jack dispelled is the notion that reverse splits make stocks more attractive by increasing their price. While the stock price might appear more respectable after a split, he reiterated that the underlying issues remain.
The company's market cap doesn’t change, and the move often signals to savvy investors that the company is in distress.
Jack told us that every stock he trades starts with a bullish trend. Regardless of positive news, great products, large cash reserves or anything else — if a stock is not in a long-term bullish trend, he will not trade it.
Looking Ahead
As we look forward to AVGO’s 10-for-1 stock split this coming week, Jack is quick to point out that this is a stock split worth your attention.
With a pre-split share price over $1700, as well as a long term bullish trend and a leading position as a chipmaker supplying the AI ecosystem, the stock checks all the right boxes.
— The Prosperity Pub Team
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