MW Stock splits tend to boost a company's shares. Here's how to find candidates.

By Michael Brush

This 'divide and conquer' investing strategy can lead you to stock-market winners

Every time a company announces a stock split, fastidious analysts point out that splits make absolutely no difference since key metrics like earnings get split along with the shares. Same pizza, more slices.

But these nitpickers miss the big picture. Splits matter - because these stocks outperform after the announcement, by a lot. Average returns one year later are 25% vs. 12% for the S&P 500 SPX as a whole, say researchers at Bank of America.

It's worth brushing up on stock splits now, for two reasons. Stock splits are picking up again after a decade-long lull. There were 17 last year, the most since 2013. These included Nvidia $(NVDA)$, Broadcom $(AVGO)$, Walmart $(WMT)$ and Chipotle $(CMG)$. Stock-split outperformance has picked up, too, says Bank of America. On average, the shares of stocks that split in 2024 advanced 17% after six months.

What explains this "divide and conquer" effect? Portfolio managers and strategists offer these reasons.

1. Splits make stock more attractive to the retail investor: A longstanding theory is that lowering the price of a stock makes it more attractive and easier to buy for people with small accounts. "It has to come from some type of flows, probably from retail," says David Wagner, a portfolio manager at Aptus Capital Advisors.

This may matter less now that many brokerage accounts offer fractional shares. But the theory still holds up, says John Buckingham, editor of the Prudent Speculator stock newsletter. "We know the market is ruled by emotion," he says. "So, any time you can feed the beast positive news and provide enthusiasm to an investing audience, stocks can appreciate. Stock splits give investors a warm and fuzzy feeling."

There's also a practical angle. A stock split increases the odds a company could be included in the Dow Jones Industrial Average DJIA, notes Jay Woods, the chief global strategist at Freedom Capital Markets. This can boost performance. The Dow is a price-weighted index, so companies with stratospheric stock prices will never qualify, since they'd influence the index too much. Split the stock, and there's a better chance. For example, Apple $(AAPL)$, Amazon.com $(AMZN)$ and Nvidia all joined the Dow after splitting their stocks.

2. "Stock split" is really just code for "momentum play": For decades, one of the most successful styles of investing has been owning "momentum" stocks. The theory here is simple. Stocks going up tend to keep going up. This approach was popularized years ago by investing legend Martin Zweig, who famously summed it up with his signature expression, "Don't fight the tape."

Since stocks that split have high prices, by definition, buying stock-split shares invariably puts you in a momentum play. "The reason companies split their stocks is that they have gone up a lot, and things in motion tend to stay in motion," Buckingham says.

3. Splits make stocks easier to buy and own: Three factors make stocks cheaper and easier to buy, and own: A tighter bid-ask spread, higher liquidity and lower volatility. A Nasdaq study has found that all three factors improve after stock splits. Nasdaq found bid-ask spreads improved by 22%, trading volume increased 18% and volatility fell 3%.

Potential stock-split names

1. Goldman Sachs Group $(GS)$: Shares of this blue-chip investment bank trade close to $670, and are up more than 65% in the past year. That's the kind of price-plus-momentum combination that sets up a stock split. Goldman Sachs is due for one, says Buckingham at the Prudent Speculator.

Even without help from a split, Goldman Sachs shares could do well. "The latest earnings were sensational. Goldman Sachs blew away Wall Street estimates," he says. Yet the bank still trades at a reasonable 14 times forward earnings, says Buckingham, a value investor.

2. Meta Platforms $(META)$: This social media giant's stock trades at about $700 per share and its up around 50% in the past year. That's the kind of stock action that propels a name into the stock-split universe.

Even without a push from a stock split, the shares should continue to do well, Buckingham says. "Meta is turning in fantastic results," he says. "Meta seems to be a major beneficiary of advances in AI." The stock trades at around 25 times trailing earnings, but that might not be too rich, given its potential. Says Buckingham: "That is reasonable for a company with significant growth and a tremendous amount of cash on the books."

3. BlackRock $(BLK)$: At around $985 per share, the stock of this asset manager is up 74% in the past five years. These factors make it a viable split candidate.

But even without a split, the stock should do well, Buckingham says. BlackRock is the largest asset manager in the world, with $11.5 trillion in assets under management (AUM). If markets continue higher because the economy stays on track, BlackRock's AUM will grow, and so will fee income.

Through its iShares exchange-traded fund platform and institutional index fund offerings, BlackRock offers a wide array of products that investors want, Buckingham says. This diversification protects BlackRock from swings in the popularity of investment products.

4. Netflix $(NFLX)$: With its shares at $1,044 following 85% gains in the trailing year, Netflix has the profile of a company ready for a stock split. Even without a split, the company's cult-like following and loyal user base should support growth, says Woods at Freedom Capital Markets.

Netflix added a record 19 million new subscribers in the fourth quarter of 2024 and 41 million for the full year. That pushed its subscriber base above 300 million worldwide. Lower cost ad-supported subscriptions have opened up a new chapter for growth.

How to find stock-split candidates

If you want to hunt for stock-split candidates on your own, focus on stocks that trade north of $500. Then favor the ones with the strongest returns. "Stocks usually split after a consistent run of strong performance," writes Jared Woodard at Bank of America's Research Investment Committee.

He highlights the following potential split candidates, all of which have posted five-year annualized gains of more than 30%: Fair Isaac $(FICO)$, Texas Pacific Land $(TPL)$, Eli Lilly $(LLY)$, United Rentals $(URI)$, KLA $(KLAC)$, Axon Enterprise $(AXON)$, McKesson $(MCK)$ and Ameriprise Financial $(AMP)$.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NVDA, AVGO, AMZN, META, NFLX, TPL, LLY, and AXON. Brush has suggested NVDA, AVGO, WMT, CMG, AAPL, AMZN, GS, META, BLK, NFLX, TPL, LLY and AXON in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks

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February 22, 2025 12:51 ET (17:51 GMT)

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