Thursday, January 21, 2010

So What is a Split-Adjusted Share Price?

Let's use an example:

Over the years, Stryker has undergone multiple stock splits. If you compare the historical price of Stryker stock to those values of the present day stock this would not accurately reflect performance. For this reason, one must compare the "split-adjusted" share price.

Hypothetically, when Stryker went public the cash price for Stryker stock was $10, after four years the share price appreciated to $50, then Stryker's management decided that a 2 for 1 share split was appropriate, reducing the share price to $25. As years went by, Strykers stock rose to $50 per share and according to Stryker's policy the stock was split each time the stock reach $50. Let's say that the company split its shares four times since going public.

The share price has then appreciated much more than 2.5 times from $10 to $25 dollars. In actuality if the stock had undergone four 2 for 1 splits, therefore, one original share would be worth $400. So if you bought one original share and held it you would have 16 shares. So even though the current share price is $25, one original share is worth $400 per share, and therefore appreciated 40 times. This is called a "tenbagger" an elusive investment that many investors look for.

Examples of tenbaggers are blue-chip stocks like Stryker, General Electric, Exxon, WalMart etc..... These are considering once in a lifetime investments. So what's the big brouhaha about this investigation? It seems that a double standard potentially exists when it comes to private investors unloading stock versus insiders. Robbins Umeda will have a difficult time proving their case, yet when one performs due diligence on this company it seems that they do their legal homework before jumping off the bridge. In all likelihood certain accounting improprieties will be exposed, Stryker will reach a settlement with the shareholders, and deny any culpability in its employees actions. Let's wait and see considering that the only people that will be making money are the vultures representing the shareholders and Stryker.

1 comment:

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