I have a question about stock when they have a reverse stock split. Is this good for a stock? I have one that I have had forever that I got at $7.00 and now is about 3.85 (this was before your great newsletter, I would now never hold a stock till it was 1/2 the price). Would it be better to sell now before the reverse split goes into affect and hold it and see what happens? (May 31, 2003)
Typically it is not a good sign for a stock to announce a reverse stock split. It is usually a defensive move taken to stay listed on an exchange or otherwise generate price stability (at a higher level), something the company has been unable to do on its own. The split itself does not change the fundamentals, and without more it rarely has the desire effect in that most reverse split stocks find themselves below their post-split price within 12 months.
That is not always the case. A general market rally can help. More than that, however, when making the decision on the stock you have to look and see if there is anything else going on that could cause price appreciation after the split is effective. Is there new management, increasing sales, new relationships, etc.? MSTR was one of the early reverse split success stories last year. It reverse split but also announced some changes, some agreements, and some improving financial numbers. Those along with the reverse split helped jumpstart MSTR and made it an early leader in the rally.
As far as hanging onto a stock such as PCLN unitl a reverse split is effective, if it is moving well before the split it is worth letting it run. During the long downtrend reverse splits were a signal for shorts to enter the market. Now with a new budding uptrend, stocks that are working well into a split may continue that action into and after the split.
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