Here’s why we’re fans of Amazon’s 20-for-1 stock split
Investing Club members taking a look at the Charitable Trust portfolio or pulling up an Amazon (AMZN) quote may notice some changes to the e-commerce and cloud giant’s stock price. That’s because as of Monday, shares officially split 20-for-1 . What that means for Amazon shareholders is that for every one share owned on Friday they will see 20 shares in their accounts. Moreover, the per-share price will have been divided by 20, as will the cost basis. Amazon rose more than 5% early Monday to nearly $129 per share, before moderating those gains. On a post-split basis, Friday’s close was $122.35. In addition to updating the Trust’s portfolio page to reflect these changes, we have also adjusted our price target to $160 per share. Importantly, this price target update does not reflect any change in our target valuation or methodology. It’s simply our prior price target divided by 20. Our 2 rating on Amazon stock , which means wait for a pullback before buying it, remains unchanged. While a stock split does not reflect any change in the company’s underlying fundamentals, we are fans of them when the share price becomes so high that it prevents ownership of a full share by retail investors. That was the case for Amazon. Before the split, Friday’s close was around $2,440 per share. Sure, fractional shares are offered on many brokerage platforms these days but the reality is, people want to own full shares, and splits allow them to do so more easily. The split may not change the valuation of the company, but it does serve to address a behavioral bias that investors may not realize is impacting their investment decisions and therefore performance. With that in mind, the one area of the market where we do see a material difference following stock splits is options trading. For those unfamiliar with how options work, investors can pay about a premium for the right-but-not-the-obligation to buy or sell 100 shares, every contract is based on 100 shares, of a given security at a specific price. Options are used by some investors in hedging strategies. For example, an upside bet, which is referred to as a call, would have had a notional value of $244,000 on Friday — 100 shares multiplied by the $2,440 per share price. Based on 5% premium, that amounts to an upfront cost of roughly $12,200 — not to mention that many people can’t afford 100 shares outright. With this split, however, the value of 100 Amazon shares becomes worth about $12,200, with a 5% premium of just $610, a much more affordable entry point on both measures. At the Club, we don’t trade options. We only buy what we believe to be underalued stocks. Our cash position is our only hedge. The bottom line: Stock splits do nothing to impact the underlying fundamentals or a company’s overall valuation. However, they can help investors address a bias against owning fractional shares that may keep them out of a great opportunity and they absolutely make speculation and hedging via options more accessible. As a result, we think splits are indeed a net positive. The one last thing to be mindful of is that with that increased accessibility may come an increase in volatility. However, as long-term investors, volatility should be viewed as an opportunity to pick up shares in great companies at reasonable valuations. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
