Investors riding high on Apple and Tesla stock splits could get clipped, data shows

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stock splits by Apple and electric carmaker Tesla should reconsider the guidance and its intent.” data-reactid=”20″>The first rule of successful investing is “buy low, sell high.” But anyone planning to apply that time-honored principle following today’s stock splits by Apple and electric carmaker Tesla should reconsider the guidance and its intent.

As much as Apple CEO Tim Cook and Tesla CEO Elon Musk would love for people to snap up shares in their companies now that the post–stock split prices are “lower”—as, indeed, investors did Monday, and for weeks prior—prospective stock-buyers best be wary.

All for one and one for all

Apple’s 4-for-1 stock split reduced the company’s share price from about $500 per share to about $125—but quadrupled the number of shares to about 17 billion. Following the split, Apple’s share price climbed as much as 4% to more than $130 per share.

market capitalization of $2 trillion. Its stock price is up 35% since its management announced the stock split on July 30, and it’s up more than 70% since the beginning of the year.” data-reactid=”29″>Apple recently became America’s first publicly traded company to surpass a market capitalization of $2 trillion. Its stock price is up 35% since its management announced the stock split on July 30, and it’s up more than 70% since the beginning of the year.

It’s a similar story for Tesla. The automaker’s 5-for-1 stock split dropped the share price from $2,213 to $444—and the share price rose nearly 13% to about $498 per share after the division on Monday. Tesla’s shares already rocketed up more than 80% since the company announced its plans for a split on Aug. 11.

Splitting shares, splitting hairs

Stock splits are a tactic that management teams use to make a company’s shares more attractive to retail investors. Since the move ostensibly lowers the price of a share, more small-time investors can afford them.

For retail investors, the logic behind buying shares solely based on the announcement of a stock split rests on a shaky foundation. In today’s world where stock trading is free across the major brokerages and where anyone can participate in fractional investing (in which people can buy fractions of a share), there’s no reason a high share price should pose a barrier to investing.

The most generous appraisal one can lend a stock split is reading it as a vote of confidence by a company’s board that they believe in the underlying health and future growth prospects of the company. Stock splits tend to draw attention to companies that conduct them—and increased hype can translate into more stock sales.

Short-term pain, long-term gain?

The academic literature on the performance of companies’ post-split stocks is inconclusive.

well-known study led by David Ikenberry, professor of finance in the business school at the University of Colorado at Boulder, found that most company’s share prices rose in the years following a stock split for the period surveyed, between 1975 and 1990. An earlier influential study found no significant gains for the period between 1927 and 1959.” data-reactid=”37″>A well-known study led by David Ikenberry, professor of finance in the business school at the University of Colorado at Boulder, found that most company’s share prices rose in the years following a stock split for the period surveyed, between 1975 and 1990. An earlier influential study found no significant gains for the period between 1927 and 1959.

defies better judgment—Apple’s stock splits in the past preceded price dips in the weeks that followed.” data-reactid=”38″>While Tesla has no history of stock splits—and the possibility that investors will reap a return commensurate with their zealotry defies better judgment—Apple’s stock splits in the past preceded price dips in the weeks that followed.

CNBC points out.” data-reactid=”39″>Apple has split its stock four times since it went public in 1980. On average, the price of Apple’s stock tends to go down in the weeks following a stock split: Selloffs dampened the price by 5.6% two weeks after split, on average, according to data from Kensho, a market analytics company, as CNBC points out.

Ally Invest, an online brokerage, found that Apple generally outperformed the market one year after its stock splits, on average.” data-reactid=”40″>While there might be some pain in the short term, investments may fare better in the longer term. Another assessment by Ally Invest, an online brokerage, found that Apple generally outperformed the market one year after its stock splits, on average.

second-ever stock split in June 2000, wrecked investors’ returns. Economic uncertainty and the devastation caused by COVID-19 could spell trouble ahead too.