Last Thursday on 7/30/20, AAPL announced into their quarterly earnings a 4-for-1 forward stock split with a record date of 8/24/20 and an ex-date of 8/31/20. Stock splits tend to attract a lot of investor attention. Stock splits are cosmetic as they do not change the intrinsic value of the stock. In the case of a 4-for-1 forward stock split, investors who currently own AAPL stock will receive three additional shares for every 1 share after the market closes on 8/24/20. When AAPL begins to trade on a split-adjusted basis on 8/31/20 the new AAPL price will be around $100-plus based on AAPL stock price divided by 4. This is the same market capitalization as before the stock split.
Why do companies split their stock?
The most common reason a company would split its stock is to make its shares cheaper to buy. Another reason for the split is to make the stock more accessible to a broader base of investors, namely the investment public. Retail investors tend to favor lower-priced stocks over higher-priced stocks. Some companies also split their stock periodically in order to maintain a desirable share price. Again to keep the stock affordable for investors to buy.
Do stock splits create value?
A stock split does not have any effect on the company’s intrinsic underlying value as it is a cosmetic move. However, it can create investor excitement soon after the stock split is announced. There have been numerous academic and professional research studies on stock splits and their performances. The majority of these studies suggest that reverse stock splits led to challenging periods for the stock in question. However, forward stock splits tend to lead to out performances during the year of the split announcement and this momentum can carry over to the ensuing years.
AAPL stock splits
The AAPL announcement last Thursday is not uncommon. The company has approved similar stock splits four previous times including the 2-for-1 split on 6/16/87 (ex-date), 2-for-1 split on 6/21/00, 2-for-1 on 2/28/05, and 7-for-1 on 6/9/14.
So, do stock splits in AAPL hurt or help its future stock price trends?
The results have been mixed as the two 2-for-1 stock splits during June 1987 and June 2000 led to a flat to decisive bearish downturns in the years following the respective splits. However, the 2-for-1 split in February 2005 and the 7-for-1 split in June 2014 led to very bullish rallies and major price appreciations. It is also important to remember the tech giant’s most recent split in 2014 enabled it to be considered and eventually be included in the Dow Jones Industrial Average (INDU).
Upon further analysis, it appears, that at least with AAPL, the performances of the stock depended heavily on the dominant and prevailing primary trends of both the stock (AAPL) and the stock market (SPX). That is when AAPL and SPX were both in primary uptrends the stock rallied higher after the stock split, and this momentum would continue into the subsequent years ahead. Conversely, when AAPL and SPX were in primary downtrends or were headed toward primary downtrends the stock splits hurt the stock. Since AAPL and SPX remain in primary uptrends it is reasonable to expect higher AAPL prices, at least over the near-to-medium term.
AAPL Parabolic Curve?
Another technical study on AAPL shows the potential for a parabolic trend developing since 1998 bottom. A parabolic curve is one of the strongest and most explosive of all uptrend trend patterns. As the name implies, the parabolic curve is named after a parabola. It is denoted with a parabolic move where the speed and the magnitude of the stock’s price increase exponentially as it nears the peak.
These patterns are generally associated with major growth stocks and market leadership names. The strong price pattern often gives a trader/investor explosive returns in a very short time period. In the majority of these occurrences, you will witness parabolic moves near the beginning or at the end of a major bull market advance. A classic parabolic trend will often look like a staircase with a step-like pattern. This formation is depicted on the charts by short-to-medium-term trading ranges or technical bases that are followed by breakouts to new highs and repeating patterns as the price trends higher and higher. The end comes when the stock moves straight up into an unsustainable extreme overbought level. It suddenly reverses direction and plunge at an even faster than when it rose.
Will the current 4-for-1 stock split in AAPL trigger the next explosive rally as well as the next major correction? If history has taught us anything, it is that parabolic moves can last a while but they always end with a deep and dramatic price downturn typically around 61% to 75% of the last price rally.