The Stock-Split Hype: One Company to Steer Clear of in 2024

The investment climate on Wall Street has been extraordinarily erratic since the onset of the decade, witnessing major index fluctuations and frequent shifts between bear and bull markets. Amidst this uncertainty, investors have gravitated towards companies that have historically demonstrated strong performance, notably those who've opted for stock splits. Such strategic moves have captivated investor interest over the past few years.

Stock splits come in two flavors: forward and reverse. A forward stock split reduces the share price while increasing the number of shares available, making the stock more accessible to retail investors. On the other hand, reverse stock splits consolidate shares to boost the stock price, typically used by companies facing delisting threats. These maneuvers, however, do not directly affect a company’s market capitalization or operational outcomes.

Rise of Stock-Split Enthusiasm Among Investors

Between mid-2021 and 2023, several leading corporations executed forward-stock splits. Notable examples include Nvidia, Alphabet, and Amazon, with split ratios of 4-to-1, 20-to-1, and 20-to-1, respectively. These stock splits, despite being geared by investor sentiment in the short term, generally signal businesses that are outperforming and out-innovating their peers.

Nvidia, post-split, has substantially contributed to the AI revolution through its cutting-edge GPUs, dominating data center usage. Alphabet’s Google has maintained an overwhelming presence in internet search and cloud services market share. Amazon too, continues to lead in online retail and global cloud infrastructure through AWS – a critical component of the company’s operating income.

Consequently, the allure of stock-split stocks is understandable, yet it’s important to recognize that they are not all equal investment opportunities.

A Popular Stock-Split Stock to Avoid Now

Reverse stock splits are often indicative of struggling companies, despite a few exceptions where they proved beneficial in the long run. Canopy Growth, once a celebrated name in the cannabis industry, underwent a 1-for-10 reverse stock split in late 2023. This move was a red flag, plunging the company's market value significantly below its peak. Canopy’s tale of caution highlights several missteps - regulatory hurdles, misjudgment of consumer trends, and managerial miscalculations have plummeted its financials and cast doubt on its survival.

The company's inflated investments and expansion without proper demand anticipation led to massive goodwill impairments. Despite internal attempts at financial restraint, profitability remains elusive. Canopy’s dwindling cash reserves and warning from auditors concerning its viability heighten investor risk. Furthermore, the uncertainty surrounding U.S. cannabis legislation dampens prospects for Canopy’s entry into the vast American market, complicating its comeback trajectory.

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