4 things that have learned from the Apple / Tesla stock split

This is a historic year for Wall Street. In no particular order, we observed:

• Fastest bear market decline since record highs in history (34% decline in S&P 500 after 33 calendar days).
• The largest sharp rally in stock market history as the S&P 500 recovered from a bearish market low in less than five months.
• Short period of negative oil prices West Texas Intermediate.
• an Apple (NASDAQ: AAPL) become the first American company to surpass the $ 2 trillion valuation.

And at the end of August, we added another first to the list: the electric vehicle (EV) manufacturer. Teslafrom (NASDAQ: TSLA) the first split of shares…

In fact, over the past month, no story has garnered more attention from the investment community than those of Apple and Tesla. corresponding share split of 4 to 1 and 5 to 1which were adopted prior to the market opening on Monday 31 August. This could be due to the fact that Apple and Tesla have increased market value by $ 653 and 187 billion, respectively, since the announcement of the share split.

While the split has absolutely no effect on the market capitalization or fundamentals of the company – i.e. it is purely cosmetic in nature and is intended to increase or decrease the value of the company’s stock and shares in circulation – you certainly don’t know this by looking at Apple stock and Tesla. last performance.

Now that these cracks are reflected in the rearview mirror, here are four important takeaways that could affect whether other high-profile stocks follow suit.

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Image source: Getty Images.

1. Splitting stocks creates a strong perception of value

The first lesson we learned from these two stock splits is how important investor perception can be.

For example, if you have one Tesla share at $ 2,000 or five shares at $ 400, your total value will be the same. But from a psychological point of view, it is much easier for an investor to come to terms with buying additional Tesla shares at $ 400 than buying one share at $ 2,000. It is also easier for an investor to raise $ 400 of free cash than to raise $ 2,000 to buy a stock.

Equity investment helped to overcome the overpricing bias. However, not all brokerage companies allow their users to buy fractional stocks, including TD Ameritrade, E * Trade, and Vanguard. This makes it much easier for millions of retail investors to add Apple or Tesla to their portfolio.

Image source: Apple.

2. Having a brand matters.

It may be a matter of course, but being a branded company really helps when it comes to splitting stocks. Apple and Tesla the two most recognizable brands in the States… Many consumers across the country have formed emotional attachments to one or both of these brands.

Other public companies that carried out a forward share split in August received little support. For example, an integrated circuit (IC) manufacturer Power integrations announced a 2-by-1 stock split on July 30, the same day Apple announced a 4-to-1 stock split. However, Power Integrations shares have dropped nearly 10% since the split was announced. This is because it is a relatively unknown company that does not have a direct consumer presence. It supplies its ICs and electrical components to original equipment manufacturers.

Without a brand name, a split usually does not occur.

Image source: Getty Images.

3. Retail investors are almost certainly pushing Apple and Tesla to grow.

We also learned that retail investors were likely the driving force behind the hype and subsequent growth at both companies.

How do we know this? Just over three weeks ago, wealth managers with more than $ 100 million in assets were required to file Form 13F with the Securities and Exchange Commission. These forms give you an overview of what the smartest money managers have been up to in the last quarter. As for Apple, financial managers headed for the exit… The total number of shares held by 13F bidders is down nearly 140 million (5.2%) from the first quarter. As for Tesla, the number of shares held by the 13F applicants did increase, but only by about 2 million shares (2%).

It is clear that there are flaws in the 13F docs. Namely, we are looking at information that is more than two months old today. Big money may have played a role in the spike in Apple and Tesla stock prices, which is not yet known or reflected in these SEC documents. But that 13F data suggests retail investors are behind the rising valuations of Apple and Tesla.

Image source: Getty Images.

4. The market can remain irrational longer than you can remain solvent.

Last but not least, we were reminded that the irrational behavior of the stock market or individual capital can have persistence.

Tesla, for example, was called himself too expensive his own CEO, Elon Musk, May 1. Tesla’s price adjusted for the split was $ 140 that day. In four months, Tesla shares have more than tripled from Musk’s personal valuation statement, which belies my own repeated arguments that The company is prized for excellence… Tesla did not cost more than auto drains Toyota, Honda, Daimler, Ford, General Motors, Vwand Ferrari put together, although Tesla only produces about 500,000 EVs a year. Emotional investing is driving this short-term rally.

The same can be said for Apple, which is now valued at about 35 times its projected earnings. Apple’s projected earnings have fluctuated 10 to 20 times over the past decade. It was suddenly appreciated as a service company, despite the fact that its fast-growing service segment accounted for only 19% of its sales in the first nine months of fiscal 2020.

None of the ratings make sensebut both could climb higher.