4 things learned from Apple and Tesla stock divisions
It has been a historic year on Wall Street. In no particular order, we witnessed:
- The fastest bear market drop from all-time highs in history (a 34% drop in the S&P 500 in 33 calendar days).
- The biggest rebound in stock market history, the S&P 500 recouping all of its losses from its bear market bottom in less than five months.
- A brief period of negative West Texas Intermediate crude oil prices.
- Apple (NASDAQ: AAPL) becoming the first US company to surpass the $ 2,000 billion valuation mark.
And at the end of August, we added another first to the list: electric vehicle (EV) manufacturer You’re here‘s (NASDAQ: TSLA) first stock split.
In fact, over the past month, there hasn’t been a story that has garnered more attention in the investment community than that of Apple and Tesla. division of respective shares 4 for 1 and 5 for 1, both of which were enacted before the market opened on Monday, August 31. This could be because Apple and Tesla have added $ 653 billion and $ 187 billion in market value respectively since announcing their stock split.
While a stock split has absolutely no impact on a company’s market capitalization or fundamentals – that is, it is entirely cosmetic and designed to raise or lower the price of the stock. shares of a company and outstanding shares – you certainly wouldn’t know from looking at those of Apple and Tesla. recent performances.
With those divisions now in the rearview mirror, here are four important takeaways that could dictate whether other high-profile actions follow suit.
1. Stock splits create a strong perception of value
The first lesson we learned from these two stock splits is how important investor perception can be.
For example, whether you have one Tesla stock at $ 2,000 or five stocks at $ 400, the total value you own is exactly the same. But psychologically speaking, it’s much easier for an investor to agree to buy additional Tesla shares at $ 400 than to buy a single stock at $ 2,000. It is also easier for an investor to raise $ 400 in extra cash than it is to accumulate $ 2,000 to buy a stock.
Investment in fractional shares helped combat the bias associated with high stock prices. However, not all brokerage firms allow their users to purchase fractional shares, including TD Ameritrade, E * Trade, and Avant-garde. So, for millions of retail investors, adding Apple or Tesla to their portfolios has become considerably easier.
2. Having a brand name is important
It might go without saying, but being a branded company really helps when it comes to attracting stock split. Apple and Tesla are two of the most recognized brands in the United States. Many consumers across the country have forged an emotional attachment with one or both of these brands.
Other public companies that did forward stock splits in August have gained little or no popularity. For example, the manufacturer of integrated circuits (ICs) Power integrations announced a 2-for-1 stock split on July 30, the same day Apple unveiled its 4-to-1 split. Yet Power Integrations stock has fallen nearly 10% since its announced split. This is because it is a relatively unknown business with no direct consumer presence. It supplies its integrated circuits and electrical components to original equipment manufacturers.
Without a brand name, a stock split is generally a non-event.
3. Retail investors are almost certainly pushing Apple and Tesla up
We also learned that retail investors were likely the driving force behind the hype and subsequent upward moves in both companies.
How do we know this? Just over three weeks ago, fund managers with over $ 100 million in assets under management were required to deposit Form 13F with the Securities and Exchange Commission. These forms give an overview of what the smartest fund managers have been up to over the past quarter. Regarding Apple, fund managers were heading for the exit. The total number of shares held by 13F filers decreased by nearly 140 million (5.2%) from the first sequential quarter. As for Tesla, the number of shares held by 13F filers has increased, but only by about 2 million shares (2%).
Of course, 13F deposits have flaws. Namely, we are reviewing information that is more than two months old to date. Lots of money could have played a role in the soaring Apple and Tesla stock prices which is not yet known or reflected in these SEC files. But this 13F data suggests that retail investors are behind the surge in Apple and Tesla valuations.
4. The market can stay irrational longer than you can stay solvent
Last but not least, we were reminded that irrational behavior in stock markets or individual stocks can have resistance.
Tesla, for example, was decried as too expensive by its own CEO, Elon Musk, May 1. Tesla’s adjusted price that day was $ 140. In four months, Tesla’s shares have more than tripled since Musk’s personal appeal on the valuation of his company, and this has defied my own repeated arguments that the the company has a price for perfection. Tesla was briefly worth more than auto stocks Toyota, Honda, Daimler, Ford, General Motors, Volkswagen, and Ferrari combined, even though Tesla only produces about 500,000 electric vehicles per year. Emotional investing is the driving force behind this short-term rally.
The same goes for Apple, which is now valued at nearly 35 times earnings over time. Apple has hovered between 10 and 20 times its anticipated profits over the past decade. It is suddenly valued as a service company despite the fact that its fast growing service segment was only responsible for 19% of its sales in the first nine months of fiscal 2020.
Neither assessment makes sense, but both could go even higher.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.