Investors tend to cheer stock splits.
There is some evidence that stocks outperform following a split.
Netflix has one of the highest share prices on the stock market.
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Stock splits don’t change the fundamentals of a stock, but they still have a way of getting investors excited and capturing media attention.
First and foremost, stock splits tend to represent milestones in a stock’s growth. They signal that management is confident enough in the business to lower the individual share price, effectively resetting shares for another run higher. There’s also some evidence that stocks tend to outperform following a split.
According to research from Bank of America going back four decades, stocks that underwent a split rose 25.4%, more than doubling the return of the S&P 500 at just 11.9%, as the infographic below shows.
Image source: Statista.
That pattern seems to be evidence of correlation rather than causation. After all, companies are free to decide when they split their stocks, and they’re more likely to do so when they’re confident that the price will continue to rise. And splits are more common in bull markets, especially during surges like the dot-com boom. They’re rarely seen during bear markets.
Given the propensity for outperformance following a stock split and the fact that the share price is lowered, benefiting retail investors, it’s not surprising that the moves tend to attract so much attention.
One top stock that could be next in line for a split is Netflix (NASDAQ: NFLX), the streaming giant that has bucked the broader malaise in the entertainment industry to deliver monster returns over the last three years.
NFLX data by YCharts.
Netflix’s shares are now hovering around $1,200, giving it one of the highest share prices in the S&P 500. The company is set to report fourth-quarter earnings on Oct. 21, and that could serve as an opportunity to announce a split since companies often choose to time them with earnings reports.
Netflix’s 400% gain over the last…
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