When a stock performs well, an announcement of a coming stock split can make investors even more optimistic. The announcement of a reverse stock split, more often than not, is a desperate act from a dying company. An announcement that a company is going to do a reverse split leaves investors wondering if their shares just received the kiss of death, and if the share price is on it’s way to zero.
A reverse split is a way to prop up a company’s share price by exchanging a set number of shares for a new share, example a 1 for 10 split. The split reduces the outstanding share count and raises the share price. Much of the time a reverse split is done because a companies share price has dropped so much that it is in danger of being delisted. Often by doing a reverse split, a company can raise it’s share price high enough to avoid delisting and companies can do this even though nothing about their business has improved.
There is no limit on how many times a company can reverse split their stock. I have seen companies do this multiple times. Another reason companies reverse split their shares, is to attract new investors to the company because of the higher share price. There are far more losers than winners, if you are going to look into the reverse split arena do some due diligence.A reverse split is usually, a sign of desperation.
There are some success stories when it comes to reverse splits. The first one I think of is Microstrategy. Microstrategy was a Wallstreet darling back in 2000. It was flying high, it’s shares were trading close to $400.00. On March 20, 2000, MicroStrategy announced that it intended to restate its financial results for the fiscal years 1998 and 1999. It seemed to me as if this started the dot com meltdown. In 2002 Microstrategy’s share price hit .50, they did a 1 for 10 reverse split and they have been off to the races since. Below is the chart for Microstrategy from www.finance.yahoo.com.
There are others such as Priceline, they did a 1 for 6 reverse split in 2003. Then there is Coeur dA’lene Mines, they did a 1 for 10 reverse split three years ago they are up about 75%. The winners are far and few between when it comes to a reverse split.
I am able to name a lot more losers than winners and for that reason I usually make money by shorting newly split shares. Two stocks that have done reverse splits in the past year are YRC Worldwide Inc.(YRCW) and Microvision (MVIS). At YRC Worldwide, they have implemented two reverse splits in the past two years and are considering another one. On October 1, 2001 they did a 1:25 split, and then on December 2, 2011 they did a 1:44 split. Now they are asking shareholders to approve a split of 1-for-300. Below is a chart of their stock performance over the past 2 years. I have been shorting this stock for months.
Microvision (MVIS) is another stock that reverse split 1:8 on February 21, 2012. Below is it’s past 3 months performance.
The charts are not pretty, but they do tell a story. If you want to make money on reverse split plays, shorting is usually the way.
As always, no matter how you trade long or short may all of your trades be profitable!!