One financial engineering move nearly guaranteed to make investors unhappy is the reverse stock split. An aggressive one enacted by specialty electric vehicle (EV) maker Canoo(NASDAQ: GOEV) on Friday was the spark that lit the fire of the stock's rout on the market. It closed the day nearly 7% lower in price, a far worse performance than the S&P 500 index's 0.7% slide.
Reversal of fortune
At least Canoo is acting quickly. It announced the 1-for-23 reverse stock split on Wednesday morning, saying that the move would take effect on Friday. Even though they knew the share count would shrink dramatically, investors eagerly sold out of the EV company's stock on "split day."
Prior to that, shareholders had voted on the move at a special meeting convened at the end of February. At that point, they assented to Canoo doing a reverse split at a ratio ranging from 1-for-2 to 1-for-30 within one year of the meeting.
The fact that the decided ratio was near the heavier end of the range, and that the reverse split was decided on barely a week after the meeting didn't exactly inspire confidence.
In danger of a delisting
As with many reverse stock splits, Canoo's goal with the measure is to regain compliance with Nasdaq stock listing requirements. These stipulate that a stock must trade at a minimum of $1 per share for a sufficient period of time in order to remain on the exchange. Canoo had until March 25 to regain compliance, hence the urgency and speed of its move. Canoo stock is down 63.99% year to date 85.79% over the past year.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
