Image Source: Unsplash

We’ve seen many notable splits in recent years as companies aim to increase liquidity within shares and erase barriers to entry for potential investors.

Lower share prices are more affordable for a greater portion of investors, although it’s worth noting that the rise of fractional share investing offered by many brokerages has alleviated this issue for some.

But why shouldn’t investors buy blindly into a split? Let’s take a closer look.

Splits are Just Cosmetic Changes
 

It’s vital to know that splits are purely cosmetic changes that do not affect a company's valuation. Splits increase the number of shares outstanding while reducing the share price proportionally, which leaves market caps unchanged.

The underlying business fundamentals also remain the exact same, with its financial health remaining unaltered. Splits shouldn’t be seen as buy signals, but rather as a reflection of underlying company strength – splits are commonly announced when share prices become ‘steep,’ which implies strong bullish nature in shares overall.

Rather, investors should focus on aspects that truly drive share prices higher, including positive earnings estimate revisions, guidance upgrades, and outsized sales growth. 

Recent Notable Splits
 

Tractor Supply Co. (TSCO - Free Report) recently underwent a 5-for-1 split back in late December, with shares down roughly 2.5% since.

Image Source: Zacks Investment Research

Cybersecurity giant Palo Alto Networks (PANW - Free Report) also underwent a 2-for-1 split in late December, with shares down nearly 12% since the split.

Image Source: Zacks Investment Research

Bottom Line
 

Splits are generally covered in positivity, as they allow a greater portion of investors to get in. While it’s a positive development, it’s critical to realize that splits aren’t an explicit buy signal, as investors should instead focus on underlying business fundamentals.

More By This Author: