To begin, it may pay to define what a stock split is: A stock split is a simple mechanism that a listed company can employ to increase the number of issued shares while keeping its market capitalisation/ valuation the same.
There are a couple of reasons a company may elect to perform a stock split, the chief among them is to increase the liquidity (or accessibility/ tradability) of their stock.
The most popular stock split ratios are 2:1, 3:2, and 3:1. By way of example, if a hypothetical company were to perform a 3-for-1 stock split, its shareholders would be issued an additional two shares for every share they owned before the split. In conjunction with the split, the value of each share would be devalued to 1/3 of its pre-split value. Effectively, the total value of three shares after the stock split should be worth the same value as one share before the stock split.
A reverse stock split is when a company reduces the number of shares available while keeping its market capitalisation/ valuation the same. A company cannot simply remove shares as easily as it can issue new shares. Therefore, with a reverse stock split, a company is forced to revoke all existing shares and issue new shares, proportional to the reduction that the company is pursuing.
A primary reason a company performs a reverse stock split is to avoid being delisted from its stock exchange which may have set minimum share-price conditions on its listees.
Tesla (NASDAQ: TSLA) performed a 5:1 split of its stock in August 2020. At the time, TSLA shares were trading above US $1,300. Tesla CEO Elon Musk believed the EV Company’s shares were too expensive for retail investors, so he reduced its price via a stock split.
Microsoft (NASDAQ: MSFT) has been a serial stock splitter. Since listing on the Nasdaq in 1986, The Software Company has performed nine stock splits, the last occurring in 2003. Consequently, 100 MSFT shares in 1986 would now total approximately 30,000 shares.
The beleaguered General Electric (NYSE:GE) performed a 1:8 reverse stock split in July 2021. Before the reverse stock split, GE shares were teetering around US $12. The reverse stock split meant that GE shares began trading above US $100 per share, a threshold not crossed for a very long time.
Here are a couple of fun facts from equities in 2020.
· The NASDAQ returned 46% from the start of 2020. If you purchased at the peak of the recessionary period in mid-March, you would've made a return on investment of 85%.
· Meanwhile, the S&P500 only returned 17% from the start of 2020.
· The average price/earnings ratio for stocks in the NASDAQ was pushing 23
· The best performing stock that is in the S&P 500 and NASDAQ was Tesla, providing a 743% Return.
With that in mind, what are we expecting for stocks coming into 2021?
I expect institutional investors (and retailer traders) to take significant money off the table this year if they haven't already. Given that there was a laggard inflow in capital to US equities in the latter part of 2020 trying to catch the bull run, I expect those inflows to take profit if equities tick up in the earlier part of this year.
With that said, I believe euphoria in inequities will continue to rise as the hunt for yield is expected to get more difficult as nations worldwide are predicted to cut rates to take advantage of the economic recovery. Furthermore, lower interest rates significantly affect discount rates for models institutional investors use, favoring equities with longer-dated cash flows – usually associated with value stocks such as banks and telecommunication companies.
When Tesla entered the S&P 500, it had to be indexed in stages because it's market cap was so large. However, it is equities like Tesla which retailer traders have been inflating. Popular names such as Zoom, Netflix, or any essential "work from home "stock has passed the eyes of retail investors, with eye-watering price/earnings multiples. Netflix continues to trade at an 80x multiple, Zoom at a 274x multiple, and Tesla at an absurd 1,673x multiple.
The issue with overpriced equities is that their influence on the indices' fluctuations rise as their market cap increases. With the NASDAQ and the S&P 500 based on the companies' market caps in the indexes, investors in ETFs that track these indices are getting heavily weighted to tracking the large companies in them. With companies such as Tesla being prone to wild swings due to its overprice valuation, anyone holding the S&P 500 will also be prone to the wild swings.
With that said, Goldman Sachs analysts are telling investors to buy stocks on any market weakness, with Peter Oppenheimer saying that the market is in the early stages of a bull phase. "The market is rising on good news but choosing to largely ignore weaker data and rising infection rates."
With extremely low interest rates in the US, which is predicted not to increase anytime in the future, paired with the Coronavirus situation in the United States, large institutions may be wanting to look elsewhere for value – specifically in places where the Coronavirus has been controlled. I believe banks in Australia will benefit from this thesis, as not only are they the parent of New Zealand banks whos economic outlook is looking far better than many other nations in the world, but they also are in an economic environment that is similar to that of New Zealand, Barr a couple of setbacks due to Coronavirus flareups.
I believe we will see another substantial year in equities due to positive sentiment, paired with a recovering economy.
The NASDAQ 100 continues to see Green, with the index up almost 1% today. In the past 120 days, the NASDAQ 100 is up 70% from its March lows, with only 42 days in red.
Market consensus is that the recent rise in equities is primarily due to the Fed's wave of liquidity, not an uncommon view. However, it is interesting to note that recently dovish outlooks from Central banks have implicitly become a buy symbol as it means the Fed will continue to shower the market with liquidity, with investors and traders betting on that liquidity, making it into the markets. Chris Gaffney, president of the world markets at TIAA Bank, stated that "Negative real yields across the globe are almost forcing people to find investments that have a potential for gain."
I believe if the Fed continues to provide accommodative financial support to the economy, equities – especially tech equities will continue to live in the perfect breeding ground to push higher. Tech stocks have outperformed most of the stock markets before the Coronavirus. However, they have proven to continue beat earnings the Coronavirus. Ie. In a world where tech stocks widen their outperformance during the pandemic alongside favorable financial conditions for risk-on assets, it easy to that it is a no brainer.
However, some analysts are getting concerned on the overstretched valuations; Maria Municchi stated that the markets are going to question whether the Fed's inventions were helping companies to create money, saying that "At some point, investors start to ask, is this just liquidity that expands [money supply] or will it be liquidity contributing to earnings."
It raises the question – is the NASDAQ 100 a bubble?
A general rule I have – if people who don't associate themselves with investing start talking about a stock or something, you're near the bubble's peak. If that person's mum starts talking about a stock, you're at the bubble's peak. Similar to Bitcoin in 2018, everyone and everyone's dog were talking about Bitcoin. This year? That topic goes to Tesla.
To ride its wave on its popularity, Tesla plans a $5 Billion "at the market" offering. It's an offering you first learn about in accounting 101, where the company takes authorized shares that are not public and offer them to the secondary market. This would dilute shareholders and require a high stock price to take the blow of the dilation – which Tesla has. They don't need the money. But it's an excellent way to leverage the stock price.
The reason I bring this up is that all the times' investors have taken short positions on the company, a wave of bull investors would force a short squeeze, pushing the stock even higher. What's the best way to bet against a bubble? There isn't – however, there's no reason for you too. If you are concerned about a drop – the best thing to do is sit it out.
Outside of work and trading, I believe everyone should have a stock/asset investment portfolio working for them.
However, we all are swayed by what we hear and what we watch.
If you're an investor, you're probably guilty of doing something similar – waking up, checking Facebook who knows you're an investor and gives you an article from CNBC saying that either
Either way, you check your portfolio. And on good days, you're like, "So why didn't Citi hire me?" However, on bad days you contemplate your decision to purchase said stock, and you think of all the cons in buying the stock. "Oh, they were overvalued, Goldman put a sell rating on it" etc. etc. However, the chances are that it is just your emotion getting to you.
I believe the whole point of owning assets is that it works for you. By looking at the returns daily, you get into this mindset that you're working for your investments – getting stressed when it goes down, wondering whether to sell when it hits all-time highs. An excellent way to alleviate this issue? Delete the app. Remove the tickers off your Stocks app. You invest in the business, and the only time you should consider divesting in your assets is if the business changes from your original thesis. Here is a couple of reasons why you should "Delete the app."
In the short run, a stock price reacts to technical factors, news, and irrational behaviors by investors. Take the Coronavirus pandemic, for example – risk assets sold off, even tech equities. However, as seen by many of their Q2 earnings, they weren't so effected at all. Comparing the pandemic to daily market moves is a stark contrast to what happens most of the time. However, it helps highlight the benefit of not having access to your portfolio's returns daily – you're not swayed by the change in the price daily. You should only be swayed by a change the original thesis you put on the business
This flows from the first point. By not being exposed to the green/red text, you can go on with your day without stressing whether your investment is a good one. Remember, time is your best friend. Time in the market is better than timing the market.
This last point (and this whole article) hinges that you invest in good businesses in the conventional sense and not wildly speculating on the stock price.
If we compare, for example, stocks to houses. It would be crazy to get your rental property valued every day So why should you do the same for stocks? If you believe in the company you invested in, you should have no problems letting it run along as normal. If you cannot comfortably let the investment sit and generate capital gains, you may want to re-evaluate
With all that said, investing may be scary for many. And that's not to say I am a perfect example either. Especially with my job, it is hard for me to ignore what is happening with my portfolio. However, I try my best to – and it starts with deleting the app.