That is about to change.
Amazon (AMZN) is doing what is known as a stock division, which increases the number of outstanding shares a company has and also lowers the share price, making them more affordable for the average investor. .
The split, which will take effect on Monday, will be a 20 by 1 transaction, which means that if you had an Amazon stock, you would end up with 20 shares after the split that each cost about 1/20 of the previous price. . Therefore, the value of your investment does not change and an Amazon stock that was quoted for just under $ 2,450 would become 20 shares that would cost a little over $ 120 each.
Why is Amazon doing this now? Companies with very high stock prices often advertise divisions in order to make stocks seem more affordable to retail investors. Google and YouTube owner Alphabet (GOOGL), which is priced at more than $ 2,300 and has a market capitalization of nearly $ 1.5 trillion, has also approved a 20-1 split in July. . Online retailer Shopify (SHOP) has a 10 to 1 share split is scheduled for late June, while Tesla (TSLA) and GameStop meme favorite (GME) have also proposed splitting their shares.
But here’s the thing: While a stock split may make it seem like a stock is now more affordable, it doesn’t really make stocks cheaper when valuing measures such as price-to-earnings ratios are observed. or price-sales. .
Amazon will still be worth about $ 1.3 trillion after the split. Shares will continue to trade more than 150 times the earnings forecast for this year and almost 2.5 times the estimated sales for 2022, ratios that are significantly higher than the broader stock market, as well as other leaders in the stock market. retail industry such as Walmart (WMT) and Target. (TGT). Many individual investors who have wanted to have growth stocks such as Amazon, Google and Tesla have often been forced to buy split shares (i.e. pieces of a share) or expose themselves to these companies through index funds. popular stock exchanges such as the SPDR. S&P 500 ETF or Invesco QQQ ETF, which tracks the Nasdaq 100.
That’s why making stock prices for four-digit stocks more affordable is a “smart fad,” according to Michael Mullaney, director of global market research at Boston Partners. This should allow more investors to buy the so-called round lots (100 shares) of a company instead of just a handful of shares.
“Retail investor trade has grown dramatically over the last year and a half and has become very important again. It’s not just about big institutions and hedge funds,” Mullaney said. “But it is impossible for an average investor to buy 100 shares of some of those shares at these prices.”
Professional investors have also noticed. Shares of Amazon rose nearly 6% last week, as some traders may be looking to buy before the split takes effect. (Amazon is still down more than 25 percent this year.) Amazon and Alphabet’s stock divisions could also serve another purpose: it could increase the chances of both companies eventually joining the Dow.
This prestigious group of 30 leading American companies is a price-weighted index rather than a market-weighted index. Thus, in the current stock prices, Amazon and Alphabet could not be added to the Dow without having a disproportionate impact on the daily movements of the index.
UnitedHealth (UNH), which is trading at just under $ 500 per share, currently has the highest weighting in the Dow, followed by Goldman Sachs (GS) and Home Depot (HD), each trading at more than $ 300. Its high stock price was one. of the main reasons why Apple (AAPL) did not join the Dow until 2015, a few months after a stock split pushed its three-digit high price to less than $ 100 per share.
Thus, the impending differences between Amazon and Alphabet could pave the way for these tech titans to join Apple and Microsoft, the only two U.S. companies with a higher market value than Amazon and Alphabet, on the Dow.
Is inflation finally peaking?
Big tech stocks aren’t the only things with inflated prices. Consumers and businesses have been facing rising commodity and service prices for most of last year. Investors will once again see rising prices as the U.S. government releases its latest Consumer Price Index (CPI) figures on Friday.
Prices rose 8.3% in the last 12 months to April. But that rise, while still stubbornly high, was the first drop in year-on-year consumer inflation since August. Consumer prices rose 8.5% in the 12 months ending March. Therefore, economists expect the level of rising prices to continue to decline over the coming months.
However, consumer prices may take some time to reach a more comfortable level for buyers … and the Fed. Ideally, the Fed would like the CPI to move away from 3% to 3.5%, if not more, before declaring victory over inflation.
“The good news is that inflation numbers should start to fall,” said Ken Shinoda, a portfolio manager at DoubleLine. “The question is will they go down enough?”
Until next time
Monday: Amazon stock fraction. Apple’s World Developers Conference begins.
Tuesday: United Natural Foods (UNFI), Smucker (SJM) and Casey’s General (CASY) gains Wednesday: Campbell Soup (CPB), Brown-Forman (BFB), Ollie’s Bargain Outlet (OLLI) and Five Below (FIVE) gains Thursday: European Central Bank meeting on interest rates; weekly U.S. unemployment claims; earnings from Nio (NIO), Signet Jewelers (GIS), Vail Resorts (MTN), DocuSign (DOCU) and Stitch Fix (SFIX)
Friday: Bank of Russia meeting on interest rates; US consumer price index; U.S. Consumer sentiment from the University of Michigan