Reverse stock splits rarely save struggling stocks
On the surface, reverse stock splits may seem like reasonable moves for struggling companies to make. Once a stock dips near or below $1 per share, there are a lot of potential dangers. First, many institutional investors are forbidden by rule from investing in stocks priced under $5. Without access to institutional capital, stocks trading under $5 are fighting an uphill battle.
Second, stocks priced under $1 per share are at risk of being delisted from the Nasdaq or NYSE. The exchanges are typically fairly lenient with stocks that dip below $1 for a short period of time. The NYSE, for example, allows 30 consecutive days of trading below $1 before it delists a stock. However, after 30 days, the company is at risk of being booted to the OTC market, which is something most legitimate companies want to avoid at all costs.
Finally, the lower a stock’s share price goes, the worse of an impression it makes on potential investors. From a psychological standpoint, a $20 stock seems like a better stock than a $2 stock.
Unfortunately, reverse stock splits rarely seem to work. A Florida State study found that only 24% of reverse stock split stocks recover at least 20% of their market cap within 250 days of the reverse split. Since most of these reverse split stocks have endured heavy losses heading into the split, this low percentage of meaningful recovery paints a bleak picture for investors.
Typically, one or more reverse stock splits is the death knell for a stock. Here are three reverse split stocks that long-term investors should avoid like the plague.
On the surface, reverse stock splits may seem like reasonable moves for struggling companies to make. Once a stock dips near or below $1 per share, there are a lot of potential dangers. First, many institutional investors are forbidden by rule from investing in stocks priced under $5. Without access to institutional capital, stocks trading under $5 are fighting an uphill battle.
Second, stocks priced under $1 per share are at risk of being delisted from the Nasdaq or NYSE. The exchanges are typically fairly lenient with stocks that dip below $1 for a short period of time. The NYSE, for example, allows 30 consecutive days of trading below $1 before it delists a stock. However, after 30 days, the company is at risk of being booted to the OTC market, which is something most legitimate companies want to avoid at all costs.
Finally, the lower a stock’s share price goes, the worse of an impression it makes on potential investors. From a psychological standpoint, a $20 stock seems like a better stock than a $2 stock.
Unfortunately, reverse stock splits rarely seem to work. A Florida State study found that only 24% of reverse stock split stocks recover at least 20% of their market cap within 250 days of the reverse split. Since most of these reverse split stocks have endured heavy losses heading into the split, this low percentage of meaningful recovery paints a bleak picture for investors.
Typically, one or more reverse stock splits is the death knell for a stock. Here are three reverse split stocks that long-term investors should avoid like the plague.
