Reverse Split on Stocks

[jbmagic]

if a company does a reverse split on a stock, is it best to cash out and get out?

[Airhog]

from investopedia

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It's usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

[SackAttack]

A reverse split usually happens when the company's in a down period, and the stock is significantly depressed. It *can* be a bad thing, as many companies use it as a last resort to avoid delisting, but sometimes you'll see it happen with a blue-chip stock that hasn't seen its best days recently.

AT&T went through a reverse split - 5 for 1 - back in '02 to prop its share price up during some kind of a business deal with Comcast. I thought I read it was a merger, but SBC bought out AT&T on 11/19/05 - basically 3 years to the day after the split - so I don't know if now all three companies are under one umbrella, or what.

At any rate, their website indicates it boosted the price from $13.51/share to about $27.20 a share, but financial articles from around then indicate that the change was from just under $5/share to around $25/share (they had fallen there from around $60/share in 1999).

It slipped to around $13, climbed back as high as $20, and then slipped back down into the teens in 2003 and 2004.

As of right now, they're at $27.13 after merging with SBC. Better than the post-split price, but one share of pre-merger AT&T would've got you about .77 shares of the new, so once you factor that in, your stock would be less valuable than it was pre-split, but with a better chance of gaining that back.

That's not the case for everybody. If it's a small company, or a company without prospects of getting a decent buyout, maybe you start looking for an out.

If the stock is an older, established company, just remember that you don't actually lose money until you sell. If you think they can ride the tough times out and find their way to stronger ground (read: make you a profit when you DO sell) stick with 'em. If nothing else, they may still pay a dividend.

Bottom line: if you get out after a reverse split, you'll almost certainly lose some money. The question is whether you would lose more by staying than by getting out versus whether their growth prospects are strong enough to weather the storm.

Heck, don't I remember Microsoft doing a reverse split sometime in the last five years?

It's not something a business wants to do, but it doesn't *have* to be the kiss of death, either.

[Desnudo]

A reverse split has no material impact to the value of your own stock holding, just as a regular split does not. It may be an indicator of something, so research.

[QuikSand]

There is some evidence that investors actually overreact to reverse splits (from the writings above, you can understand that) and that they might even present a short-term opportunity. But since they are so often a bad sign, that's probably getting a little advanced for anyone but the shiftiest of investors.

[moriarty]

Originally Posted by QuikSand

There is some evidence that investors actually overreact to reverse splits (from the writings above, you can understand that) and that they might even present a short-term opportunity. But since they are so often a bad sign, that's probably getting a little advanced for anyone but the shiftiest of investors.

I think investors tend to overreact to both stock splits (positively) and reverse splits (negatively). I don't have the data, but I suspect there is a short term increase in value after a split and decrease after a reverse. In theory though, there is no change in your overall investment value on either a split or a reverse split.

The key thing as Desnudo pointed out is to understand why the company is reverse splitting. If they're doing it to prevent being delisted, then I'd probably be worried ... but then again, you should have been worried a while ago. I also believe (but could be wrong) that some pension/mutual funds also have a price limit in that they can't hold stocks below a certain dollar value per share, so some companies may do a reverse split to not lose those institutional investors.

[st.cronin]

I would say if you already own the stock, a reverse split is not, by itself, a reason to bail out. Hopefully if you own the stock you know more about the company than just the stock price, though.