The wave of stock splits in 2021 and 2022 that included hot stocks like Amazon, Alphabet, Apple, Tesla, and Shopify has come and gone, but that doesn't mean investors can't speculate about the next one.
Stock splits don't change the fundamentals of a stock. They simply divide the pie into more pieces. In a 2-for-1 split, for example, an individual shareholder would own double the shares they had before, but the shares would be worth half as much. The total value remains the same.
However, there is some evidence that stock splits can help build momentum in a stock. Stock splits do make individual shares cheaper, making them more attractive to retail investors, and they also act as milestones for the stock. Management tends to issue stock splits when they believe the stock has reached a certain big round number that it can sustain. Psychologically, the split acts like a reset for the stock to run higher again.
Naturally, stocks with high prices are more likely to split their shares, and one candidate based on that criterion is NVR (NYSE: NVR), a top-performing homebuilder that recently was trading for $5,746 a share. It's also one of the stocks that Warren Buffett's Berkshire Hathaway bought in the second quarter.
Let's take a look at what NVR has to offer and explore its prospects for a stock split.
Image source: Getty Images.
What is NVR?
NVR is a homebuilder and a mortgage banker, providing mortgages to NVR homebuyers. It's the parent company of Ryan Homes, NVHomes, and Heartland Homes.
The company operates in 35 metro areas in 15 states across the eastern half of the country, and it has a long history of outperforming the stock market, returning more than 500% over the last 10 years.
Even during the financial crisis, NVR remained profitable while other homebuilders were driven to the brink of insolvency. It took advantage of the sell-off to aggressively buy back stock, and it also expanded into six new markets.
The company also operates with a unique asset-light business model. Rather than developing large tracts of land, NVR acquires land through lot purchase agreements (LPAs), meaning the company pays a small amount for the option to purchase lots, and can buy them when it has a homebuyer ready.
The current housing market has generally been kind to homebuilders as the sudden surge in mortgage rates has led to a lack of inventory, spurring demand for new homes.
In its second quarter, revenue fell 12% to $2.34 billion, and earnings per share was down 6%. However, new orders jumped 27% to 5,905 units, a sign that revenue growth should soon return.
NVR also has a long track record of aggressively buying back stock and just authorized a repurchase of $500 million, or about 3% of the market cap.
Will NVR split its stock?
NVR has not split its stock in the 30 years since it went public, which isn't a promising sign for a stock split.
However, with the stock now trading above $5,000 a share, it wouldn't be surprising to see the company issue a stock split. It's rare for companies to allow individual shares to get so expensive without splitting them.
NVR stock has pulled back from its peak this summer, which would seem to make a stock split less likely. But the company also brought in a new CEO last year, Eugene Bredow, a longtime company executive. Bredow might be more receptive to a stock split than previous management.
Whether or not NVR splits its stock shouldn't affect your decision to buy it. The company's record of outperformance speaks for itself and it continues to deliver strong profits and buy back stock.
Stock split or not, NVR looks like a good bet to continue beating the market.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon.com and Shopify. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Berkshire Hathaway, NVR, Shopify, and Tesla. The Motley Fool has a disclosure policy.
