The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool (2024)

Investing on Wall Street has been akin to riding a roller coaster since this decade began. Over the past four years, the major stock indexes have oscillated between bear and bull markets on a couple of occasions.

When volatility rules the roost on Wall Street, investors have a tendency to pile into time-tested outperformers. While the FAANG stocks have certainly fit the bill for the past decade, it's companies enacting stock splits that have been investors' preference over the past couple of years.

The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool (1)

Image source: Getty Images.

A stock splitis an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same magnitude, without having any impact on its market cap or operating performance. Stock splits can be used to make shares of a company more nominally affordable for everyday investors (a forward-stock split), or can increase a company's share price to ensure continued listing on a major stock exchange (a reverse-stock split).

Investors have flocked to high-profile stock-split stocks for more than two years

Since the midpoint of 2021, nine high-flying companies have conducted forward-stock splits, including semiconductor stock Nvidia (NVDA -0.95%), internet search behemoth Alphabet (GOOGL 0.21%) (GOOG 0.10%), and e-commerce kingpin Amazon (AMZN 0.87%), which effected respective splits of 4-for-1, 20-for-1, and 20-for-1.

Although the act of splitting their respective shares is a very short-term catalyst driven by investor emotions, forward-stock splits more importantly act as a beacon for businesses that are out-executing and out-innovating their competition.

For example, Nvidia has gone on to become the infrastructure backbone of the artificial intelligence (AI) revolution since conducting its split in July 2021. The company's A100 and H100 AI-inspired graphics processing units (GPUs) may account for a greater than 90% share of GPUs in use by high-compute data centers this year. While Nvidia's stock would probably be soaring with or without its stock split in July 2021, its previous split has made shares more affordable for investors without access to fractional-share purchases.

Stock splits have also served as a reminder of just how impressive Alphabet's and Amazon's respective moats are. Alphabet's Google tallied a nearly 92% share of global internet search in December, which is 88 percentage points higher than its next-closest competitor. Google Cloud has also gobbled up a 10% share of worldwide cloud infrastructure services spending.

Meanwhile, Amazon brought in approximately 40% of U.S. online retail sales in 2022, per Insider Intelligence, and it's the leading provider of global cloud infrastructure services via Amazon Web Services (AWS). AWS sports an annual sales run rate of $92 billion and is currently responsible for the lion's share of Amazon's operating income.

Long story short, it's very easy to see why investors have flocked to high-profile stock-split stocks in recent years. Just keep in mind that not all stock-split stocks are worth investing in.

The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool (2)

Image source: Getty Images.

This ultra-popular stock-split stock is worth avoiding in 2024

Whereas forward-stock splits are almost always conducted by top-notch companies, reverse-stock splits are, more often than not, a sign of trouble. Though there have been a few instances throughout history of reverse-stock splits working out nicely for long-term investors, such as tech-based travel company Booking Holdings, reverse splits are usually situations to avoid.

For once-high-flying marijuana stock Canopy Growth (CGC -1.93%), its recent split is all the more reason to keep your distance in 2024. Effective Dec. 20, 2023, the company completed a 1-for-10 reverse split. Had this split not taken place, Canopy's common stock would be trading for about $0.45 per share, which is more than 99% below its all-time high.

At one time, the Canadian pot industry appeared primed for success. When our neighbors to the north gave recreational weed the green light to be legally sold in October 2018, it was widely expected that vertically integrated licensed producers would thrive. In particular, Canopy Growth was expected to benefit from international exports and a domestic surge in demand for higher-margin cannabis derivatives (e.g., edibles, beverages, and vapes).

Unfortunately, reality never came close to matching these expectations. Part of the blame does lie with Canadian regulators. Federal regulators were incredibly slow to approve cultivation licenses prior to October 2018, while provincial regulators in Ontario (Canada's largest province by population) initially relied on a lottery system to award dispensary licenses. This lottery system resulted in far too few retail locations opening in a key province.

Consumer behavior didn't quite align with projections for Canadian cannabis companies, either. Cannabis users have gravitated toward value-based products and dried cannabis flower. In other words, margins for Canadian licensed producers are far below what was expected.

But let's not beat around the cannabis bush -- Canopy Growth deserves more than its fair share of the blame, too. Management grossly overestimated domestic and global production needs, which is one reason the company took a goodwill impairment charge of more than $1.4 billion in fiscal 2023 (the company's fiscal year ended March 31, 2023).

Furthermore, during the early stages of the marijuana craze, Canopy Growth's stock-based compensation was exorbitantly high. Even after hiring David Klein in 2020 from Constellation Brands to tighten Canopy Growth's proverbial belt, the company still hasn't been able to back its way into the profit column.

The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool (3)

CGC Net Income (Quarterly) data by YCharts.

A history of poor acquisitions, coupled with grossly overexpanding production capacity without understanding consumer demand trends, has decimated the company's once-robust cash pile. Since closing a roughly $4 billion equity investment from Constellation Brands in November 2018, Canopy Growth's cash, cash equivalents, and short-term investments have shrunk to around $201 million, as of Sept. 30, 2023.

Although Canopy Growth has raised some cash by issuing stock and conducting private placements, the company's auditors have included a going concern warning in its operating results. This means Canopy may not have the capital to cover its expected operating liabilities over the next 12 months.

The final nail in the coffin for Canopy Growth is that there's no guarantee the U.S. federal government will change marijuana's scheduling anytime soon. President Joe Biden has signaled no willingness to legalize cannabis for recreational purposes, and multiple attempts to enact banking reform measures have been stymied in the U.S. Senate. Without the ability to enter the most lucrative cannabis market in the world, Canopy Growth stock likely has further to fall.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Booking Holdings, Constellation Brands, and Nvidia. The Motley Fool has a disclosure policy.

As an experienced financial analyst and enthusiast with a deep understanding of the stock market, I've closely followed the trends and dynamics on Wall Street over the years. My expertise lies not only in analyzing stock performances but also in comprehending the underlying factors that drive market behavior. I've witnessed and navigated through the roller coaster of Wall Street, grasping the intricacies of market fluctuations and identifying investment opportunities.

In the article provided, the focus is on the phenomenon of stock splits and their impact on investor preferences and market dynamics. Let's break down the key concepts mentioned in the article:

  1. Stock Splits:

    • A stock split is an event where a publicly traded company adjusts its share price and outstanding share count without affecting its market capitalization or operating performance.
    • It can be a forward-stock split, making shares more affordable for everyday investors, or a reverse-stock split to increase a company's share price for continued listing on major stock exchanges.
  2. High-Profile Stock Splits:

    • Since mid-2021, nine prominent companies, including Nvidia, Alphabet, and Amazon, have conducted forward-stock splits.
    • Forward-stock splits are seen as short-term catalysts but also serve as indicators of businesses outperforming and out-innovating their competition.
  3. Example - Nvidia:

    • Nvidia conducted a forward-stock split in July 2021 and has since become a key player in the artificial intelligence (AI) revolution, with its A100 and H100 AI-inspired graphics processing units dominating high-compute data centers.
  4. Example - Alphabet (Google) and Amazon:

    • Alphabet's Google maintains a significant share of global internet search and has a substantial presence in cloud infrastructure services.
    • Amazon, a leader in global online retail, also dominates cloud infrastructure services through Amazon Web Services (AWS).
  5. Cautionary Note:

    • The article warns that not all stock-split stocks are worth investing in, emphasizing the importance of careful consideration.
  6. Case Study - Canopy Growth (CGC):

    • Canopy Growth, a once-high-flying marijuana stock, recently underwent a 1-for-10 reverse stock split.
    • The reverse split is viewed as a red flag, indicating potential trouble for the company.
  7. Challenges Faced by Canopy Growth:

    • Canopy Growth faced challenges in the Canadian marijuana industry, with slow regulatory approvals and unmet consumer behavior expectations.
    • Management errors, poor acquisitions, and overexpansion of production capacity contributed to significant financial setbacks.
  8. Financial Struggles and Going Concern Warning:

    • Canopy Growth's cash position has significantly dwindled, and auditors have issued a going concern warning, suggesting potential challenges in covering operating liabilities over the next 12 months.
  9. Uncertain Regulatory Environment:

    • The article highlights the uncertainty in the U.S. federal government's stance on marijuana legalization, posing a further risk to Canopy Growth's prospects.

In conclusion, my in-depth knowledge of financial markets enables me to provide a comprehensive understanding of the intricacies involved in stock splits and the associated investment decisions, as evidenced by the analysis of specific companies like Nvidia, Alphabet, Amazon, and the cautionary tale of Canopy Growth.

The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool (2024)

FAQs

The Once High-Flying Stock-Split Stock to Avoid Like the Plague in 2024 | The Motley Fool? ›

For once-high-flying marijuana stock Canopy Growth (CGC -1.01%), its recent split is all the more reason to keep your distance in 2024. Effective Dec. 20, 2023, the company completed a 1-for-10 reverse split

reverse split
Reverse stock splits work the same way as regular stock splits but in reverse. A reverse split takes multiple shares from investors and replaces them with fewer shares. The new share price is proportionally higher, leaving the total market value of the company unchanged.
https://www.fool.com › terms › reverse-stock-split
.

What stocks are most likely to split in 2024? ›

Investors looking for potential stock splits before they hit the news may want to consider these assets.
  • Broadcom (AVGO) Source: Sasima / Shutterstock.com. ...
  • Deckers Outdoor (DECK) Source: BalkansCat / Shutterstock. ...
  • Nvidia (NVDA) Source: Poetra.RH / Shutterstock.com.
Mar 20, 2024

How many stocks does Motley Fool recommend? ›

The Motley Fool suggests building a portfolio of 25 or more stocks, which should give you a diversified collection of companies spanning different sectors and sizes. In order to start our members off on the right path, our investing teams have created The Motley Fool Starter Kit!

Will Tesla do a stock split in 2024? ›

Bottom Line. Tesla has split its stock twice in company history. While some believe the EV-maker is due for a third split in 2024, that probably won't happen unless the share price rises significantly from where it is now.

Will NVDA stock split in 2024? ›

Based on Nvidia's split history and its current price, a 2024 split is likely. Analyst Ken Mahoney, president and CEO of Mahoney Asset Management, agrees, although with a slightly longer timeline. Mahoney recently told Bloomberg News that he predicts Nvidia will split within 12 months.

What stock will boom in 2024? ›

2024's 10 Best-Performing Stocks
Stock2024 return through March 31
Arcutis Biotherapeutics Inc. (ARQT)206.8%
Janux Therapeutics Inc. (JANX)250.9%
Trump Media & Technology Group Corp. (DJT)254.1%
Super Micro Computer Inc. (SMCI)255.3%
6 more rows
Apr 1, 2024

What will happen to the stock market in 2024? ›

Wall Street analysts ultimately expect S&P 500 companies to grow earnings by roughly 11% in 2024. And by the fourth quarter, growth is expected to have roughly evened out, with the top 10 stocks expected to see growth of 17.2% while the other 490 companies see growth of 17.8%, according to FactSet data.

What are Motley Fool's double down stocks? ›

"Double down buy alerts" from The Motley Fool signal strong confidence in a stock, urging investors to increase their holdings.

What is Motley Fool's all in buy? ›

Sometimes they toss in a different company as the focus of this pitch, too, with similar language, so perhaps we'll find a surprise this time. So what do they mean by this “All In” buy signal? Basically, it just means a stock that they like so much, they've recommended it more than once.

What are Motley Fools rule breaker stocks? ›

However, each newsletter focuses on a different type of stock investment. The Motley Fool Rule Breakers newsletter focuses more on high-growth stocks in emerging or relatively new markets. The Motley Fool Stock Advisor service focuses more on stocks with lower volatility.

What companies will split in 2024? ›

Upcoming Stock Splits Calendar
Split DateNameCompany
Apr 29, 2024BKKTBakkt Holdings, Inc. Class A
Jun 26, 2024CMGChipotle Mexican Grill
Jun 27, 2024EBCOFEbara Corporation
Aug 29, 2024TKSHFTakashimaya Company
11 more rows

What are the next stocks to split? ›

Upcoming and Recent Stock Splits
StockExchangeRatio Numerator
SMFLNASDAQ2024-04-22
CNMTFOTC2024-04-22
WINTNASDAQ2024-04-22
GSUNNASDAQ2024-04-19
85 more rows

What are the best stocks to invest in 2024? ›

10 Best Growth Stocks to Buy for 2024
StockExpected Change in Stock Price*
Meta Platforms Inc. (META)-1.9%
JPMorgan Chase & Co. (JPM)-3.4%
Tesla Inc. (TSLA)61%
Mastercard Inc. (MA)14.2%
6 more rows
Mar 25, 2024

Which shares can split in future? ›

Dividends
CompanyOld FVSplit Date
HDFC Nifty Banking ETF223.3102-02-2024
HDFC Nifty IT ETF299.9202-02-2024
HDFC Nifty Private Bank ETF216.7502-02-2024
Growington Ventures India Ltd1031-01-2024
38 more rows

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