Life comes at you fast in the stock market. At the start of the year, investors were so enamored of the technology sector that Alphabet Inc., Tesla Inc. and Amazon.com Inc. split their shares into smaller increments to attract even more retail buyers, often causing the stocks to rocket even further.
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Now, with sentiment toward speculative tech companies near rock bottom, hundreds of startups that have seen their shares plummet this year are having to consider the opposite move: reverse stock splits to consolidate a large number of shares into smaller amounts, boosting the share price to a less embarrassing level.
Almost 170 members of the Nasdaq Composite Index have reverse split so far this year, according to data compiled by Bloomberg, 12 times as many as did a forward split like Tesla. More are sure to follow, but investors should be wary: It won’t improve the financial fundamentals of these fallen angels, and can exacerbate a downward spiral.
You might think a stock price is just a number, but it has symbolic and practical importance, especially in the US.
Investors may perceive a company with a very low stock price as low quality. In a rare move for a large company, humbled industrial conglomerate General Electric Co. did a reverse split last year to bring its crumpled share price back into line with peers.
Some brokerages don’t provide research or recommend buying penny stocks, and institutional investors and mutual funds are often either reluctant or prohibited from investing in them.
Most importantly, the main US exchanges require listed companies to maintain a minimum share price of one dollar or face delisting. This is best avoided because the shares would otherwise trade on less liquid over-the-counter markets, impairing the company’s ability to raise capital and provide equity incentives to employees.
Currently, almost 500 Nasdaq companies — around 13% of the total — sell for less than a buck, similar to the 2008 financial crisis and the dotcom bust.
Biotech firms are the worst affected but there’s also a preponderance of former special purpose acquisition companies, which isn’t surprising. By convention, SPACs go public at $10 a share and hence a 90% drop — regrettably all too common in SPAC-land — puts them at risk of being booted from the exchange. Electric-vehicle manufacturer Arrival SA, scooter company Bird Global Inc. and used-car retailer Cazoo Group Ltd. have all received non-compliance warnings from their exchanges.
Companies typically have a six-month grace period to remedy a too-low share price, and extensions are sometimes available. At times of extreme market stress such as in 2001, 2009 and 2020, exchanges have cut companies even more slack.
Read the full article here by Chris Bryant, Advisor Perspectives.
