During periods of heightened volatility and uncertainty, it's not uncommon for professional and retail investors to gravitate to time-tested businesses that have handily outperformed Wall Street's benchmark index, the S&P 500, over the long run. It's why the collective FAANG stocks have been so popular over the last decade.
But when the going has gotten tough on Wall Street over the past three years, it's stocks enacting splits that investors have flocked to.
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More than a half-dozen top-notch businesses became stock-split stocks in 2024
To keep things simple, a "stock split" is an event whereby a publicly traded company alters both its share price and outstanding share count by the same factor. It's a purely superficial move that has no impact on a company's market cap or underlying operations.
Stock splits come in two forms: forward and reverse. A forward-stock split's purpose is to make shares more affordable for retail investors who might not have access to fractional-share purchases with their online broker. By comparison, a reverse-stock split increases a company's share price, often with the goal of meeting minimum continued listing standards for a major U.S. stock exchange.
Since 2024 began, seven high-flying stocks have announced or completed a forward-stock split:
- Retail kingpin Walmart(NYSE: WMT)announced a 3-for-1 stock split on January 30, and completed its first split in 25 years after the market closed on February 23.
- The board of fast-casual dining chain Chipotle Mexican Grill(NYSE: CMG)approved a 50-for-1 split on March 19, which will take effect after the closing bell on June 25.
- Corporate identity uniforms company Cintas(NASDAQ: CTAS) gave the green light for a 4-for-1 stock split on May 2. Shares will begin trading on a split-adjusted basis after the market close on September 11.
- On May 14, the board of Japan-based consumer electronics company Sony Group(NYSE: SONY)Ok'd a 5-for-1 stock split, which goes into effect on October 8 for the company's American Depositary Receipts (ADRs).
- Electronic components juggernaut Amphenol(NYSE: APH) had its board approve a 2-for-1 forward split on May 20, which was completed on June 11.
- On May 21, wafer fabrication equipment company Lam Research(NASDAQ: LRCX) approved a 10-for-1 stock split, which will become effective after closing bell on October 2.
- Artificial intelligence (AI) behemoth Nvidia(NASDAQ: NVDA)announced a 10-for-1 forward-stock split on May 22, which was enacted after the market closed on June 7.
While all seven of these companies have well-defined competitive advantages and have seen their respective valuations soar over the years, only one of these stock-split stocks looks investment-worthy right now.
These half-dozen stock-split stocks are all historically pricey and/or set to face headwinds
You might be thinking that the infrastructure backbone of the AI revolution, Nvidia, is the logical stock to the buy of this stock-split group -- but this couldn't be further from my thinking. History has shown that every next-big-thing innovation since the mid-1990s has endured a bubble-popping event. Since no Ai stock has benefited more directly from the rise of AI, it's Nvidia that would be hit the hardest if history rhymes, once more.
Furthermore, Nvidia is set to face an onslaught of internal and external competition. Most notably, its four top customers, representing about 40% of its net sales, are internally developing AI-inspired graphics processing units of their own.
This also means that Lam Research, which is benefiting in a big way from the packaging of high-bandwidth memory needed in AI-accelerated data centers, isn't worth buying, either. Semiconductor equipment companies tend to be highly cyclical, and Lam Research is trading at one of its most-aggressive forward earnings multiples in a long time. Add in export restrictions of its AI-driven wafer fabrication equipment to China, and you have a stock with more potential risk than reward.
It's a similar story for Amphenol, which is valued well-above its average forward price-to-earnings (P/E) multiple over the trailing-five-year period. Despite having competitive cost advantages, Amphenol is decidedly cyclical and at the mercy of the U.S. and global economy. A marked decline of close to 4% in U.S. M2 money supply since April 2022 may spell trouble for cyclical tech stocks trading at a premium.
But it's not just stock-split stocks in the tech sector whose valuations or growth trajectories are unappealing.
Chipotle Mexican Grill is valued at 47 times forward-year earnings. Although the introduction of digital ordering lanes (known as "Chipotlanes") and its limited menu have fueled operating efficiency at its restaurants, Chipotle is ultimately a food company whose organic growth rate is only in the high-single-digits.
Meanwhile, Walmart is commanding a forward earnings multiple of 25 with projected sales growth that's slated to come in just above the prevailing inflation rate. Though I can acknowledge that Walmart's size affords it cost advantages that few other retailers can match, there's minimal upside potential at a forward P/E of 25.
To round things out, corporate identity uniform provider Cintas is also aggressively valued. Even with the understanding that stock-split stocks have historically outperformed, paying a multiple of 41 times forward earnings for a cyclical business with low-double-digit forecast earnings growth through 2028 doesn't seem like a smart move for investors.
Image source: Getty Images.
This is the only stock-split stock that can be confidently bought hand over fist right now
Among the "Class of 2024" stock-split stocks, the only one that looks like a screaming bargain right now is Japan-based Sony Group.
I'll freely admit that Sony Group, like the six other stock-split stocks listed above, isn't perfect. New gaming consoles only come out every six to seven years, and sales of the PlayStation 5 have notably tapered since its introduction in November 2020. But in spite of this headwind, Sony has a multitude of catalysts, including gaming, which are capable of pushing its stock higher.
For instance, even though PlayStation 5 console sales have been unimpressive, Sony has enjoyed a steady improvement in PlayStation Plus subscription revenue. PlayStation Plus is a multi-tiered service that allows subscribers to game with their friends, as well as store their gaming data in the cloud. Subscription revenue tends to be predictable and often generates juicy margins.
It's also worth noting that Sony's next-generation gaming console may be less than three years away from hitting store shelves. It's not uncommon for the valuations of gaming companies to modestly expand in anticipation of a new console making its debut.
Beyond gaming, Sony is a top-tier supplier of image sensors used in smartphones. Although smartphone sales aren't growing at the same pace they were a decade ago, wireless providers upgrading their networks to support 5G download speeds have incented consumers and businesses to upgrade their devices. Even a modest global expansion in smartphone sales should be enough to deliver meaningful operating growth for Sony's Imaging and Sensing Solutions segment.
In addition to approving a stock split, Sony's board also gave the green light to repurchase up to 30 million shares of the company's stock, on a post-split basis. If this buyback program were completed in its entirety, it would reduce the company's outstanding share count by almost 2.5%. More than likely, these buybacks will provide a modest boost to Sony's earnings per share.
The final piece of the puzzle is that Sony Group is the only truly inexpensive stock-split stock of 2024. The company's forward P/E ratio of 15 speaks to the potential upside to come as the company takes advantage of its innovative capacity and higher-margin operating segments.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Lam Research, Nvidia, and Walmart. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.
