OPINION: “Insofar as Google’s stock has rallied solely because of its imminent stock split, odds are good that it will soon retreat to what it would have been without the split,” columnist MktwHulbert writes.
CHAPEL HILL, N.C. – Alphabet’s just-announced 20-for-1 stock split is not the bullish omen that investors are making it out to be.
A stock split used to be a bullish omen because it signaled that management was confident its stock would subsequently rise. Researchers hypothesized that a firm’s managers had a loosely defined “sweet spot” in which they wanted their stock to trade—often around $50 to $75 per share. If its price was well above that, they would split their stock only if they believed the price wouldn’t otherwise fall back into that range.
Myth No. 2: Stocks rise when added to the Dow industrials The other reason given for why Google’s split is bullish is that it’s a prerequisite for being added to the Dow Jones Industrials Average DJIA, +0.63%, and being added to the index would attract more investor interest. It used to be true that getting added to a major market average was bullish for the stock that was added. But that stopped being the case a number of years ago, according to a study from S&P Dow Jones Indices entitled “What Happened to the Index Effect? A Look at Three Decades of S&P 500 Adds and Drops.” So even if there were a lot more assets under management at DJIA-benchmarked index funds, it’s not clear that being added to the DJIA would be all that bullish.
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