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Friday, November 10, 2006

A must read for those who love Stock Splits

Stock splits aren't all they are hyped up to be especially for the smart money.

Warren Buffet has NEVER split the shares of his Holding Company - Berkshire Hathaway "A" shares were trading at over $107,000 as of 10 Nov 2006.

Regardless of the all the smokescreens about the real value of a split, the Kenyan retail investor seemingly loves bonuses & splits!

There seems to be a pattern of share prices rising in anticipation of a split. The price hits a new high & the company splits the shares to make them more affordable!
All that has happened is that some folks who owned the shares BEFORE the rally increase the value of their paper holdings.

The really smart ones cash out...

14 comments:

Kudrinketh said...

they really use the word 'affordable' loosely.since the P/E shoots through the roof after split announcement,isnt this 'affordable' talk a misrepresentation of the facts.if you tried to justify a stock split with such terms here in states you'd attract lawsuits from investors and the SEC.

coldtusker said...

kudri - We are on the same page. All I can say is... that's where an astute investor can make money!

Cash out & wait for the price to drop or find other opportunities!

glo said...

Good blog CT. Is it wise to buy after a split? EA Cables has been heading south for sometime. Do u think its a good buy now?

Ssembonge said...

The sage of Omaha dislikes stock splits because they increase liquidity and thus increase volatility. He also wants to discourage short term trades and would like to have long term investors.

Unfortunately, in this era of hedge funds with billions of dollars it doesn't work out very well.

I heard that class A shares are not available to new investors.

As for the happenings in NSE, I would term it as market manipulation. I very much doubt if it is the work of ordinary retail investors. I'm almost certain that the trades consist of huge blocks of shares changing hands between traders (or indians).

Is there a way to check the bids/sales?

coldtusker said...

glo - Prices are capricious & can have little to do with value, earnings or NAV. Therefore, I do not offer predictions.

I think EA Cables' 2006 EPS will be around 1.75 thus 30x P/E. There is presumed growth in profits as the regional economies grow therefore there is long-term potential.
Do ask yourself this: Do you trust the management?

Then after looking into all this... decide if you should buy or not. And if yes, then what price.

www.eacables.com

coldtusker said...

Ssembonge:

WB's intentions are honourable. He wants owners as partners NOT "fast-money".

Hedge Funds or not, the concept remains true: long-term goals build value over the long-term.

Class A & B shares are traded on NYSE. See the link on the post.

I do not know what drives the NSE. It is probably a combination of multiple factors including Retail Investors buying at prices without regard to value.

What have traders &/or Indians got to do with it?

You can't check on individual trades for reasons of privacy but the NSE & CMA have the powers to investigate.

Ssembonge said...

Coldtusker,
In the US you are able to see the size of the sales. Depending on your software you can see the blocks. In addition to this most websites chart the daily volumes ( minute intervals).

About the traders or indians, I was referring to people who have tons of money. I have nothing against both.

kudrinketh
ratios change with the split especially if they dependant on the authorised shares.

Kudrinketh said...

@ssemboge
Ratios do not change after a split!
For example,dividing a pizza 4 or 8 times does not increase the amount of pizza.Keep in mind that P/E is a ratio of Price per Share divided by Earnings per share,and the only reason the ratio would change is if the split creates increased earnings per share,which is not the case.

Ssembonge said...

PE = Share price/earnings per share

If you split the share price you also split the EPS

where

EPS = net income*/outstanding shares

(* - less dividends)

Net income is not affected by a split

Do the math

lets say

share price = $100
EPS = 5
Net income = $1000
Outstanding shares = 200


EPS = $1000/200 = 5
P/E = 100/5 = 20

do a 2:1 split

you get 400 shares at 50

EPS = 1000/400 = 2.5
P/E = 50/2.5 = 20


All share ratios do not change after a share split.

The only thing that changes is the share price and outstanding shares.

kudrinketh, check out WGNB Corp
http://finance.yahoo.com/q?s=wgnb&d=t

they'll do a 3 for 2 split on 16th Nov. You'll see no changes in their ratios.

Ssembonge said...

kudrinketh,
In the 1st comment you said

"since the P/E shoots through the roof after split announcement"

My bad for saying

"ratios change with the split especially if they dependant on the authorised shares."

I meant to say the opposite.


So we are in the same boat. I guess I'm a bit sluggish today.

Kudrinketh said...

@ssemboge
glad we're on same page.but you noticed how kenyan 'investors' ignore P/E and thus playing into the hands of the 'owners' of the NSE. wish i was at home,i'd trade this market like crazy and help these fools part with their money.

coldtusker said...

S: I do not see why the NSE shouldn't allow trades to be viewed esp Level 2 access.

Daytrading is not allowed on the NSE. They can't handle it.

Anonymous said...

from this discussion it looks like i should sell my ICDC shares now before the stock split, what say you?

pesa tu said...

@ annonymous: Trust your own judgement.

@ everyone: What Kenyans mean about affordable shares is the absolute price. i.e. the share is under sh.50 per unit.Thats why shares under sh.50/- jumped in recent weeks.

Kenyans dont give a damn about P/E ratios, yields etc.