Stock splits are often misunderstood. They do not change the basic values of the company; instead, they increase the number of shares available, making them more accessible to a wider range of investors.
It is similar to peeling and segmenting oranges. The orange remains the same, but smaller pieces are more convenient to consume.
This technical adjustment — a pure exercise in accounting gymnastics, really — can generate excitement in the market, as it often signals the company’s strong performance and growth potential. For those looking to take advantage of the buzz around stock splits, here are two outstanding investments on the verge of a stock split right now.
Key details on Chipotle’s upcoming stock split
Let’s start with the most obvious stock splitter. Chipotle Mexican Grill (NYSE: CMG) proposed a 50-to-1 stock split on March 19, and shareholders will vote on the proposal at Thursday’s annual meeting. The measure will be carried by an overwhelming majority.
First, I can’t recall a single example of a common stock split getting a thumbs up in the shareholder approval arena. Second, this will be the first stock split in Chipotle’s history, and the stock price is getting richer. Currently trading at $3,090 per share, there are only four beefier stock prices on the American market today.
Again, the split won’t add much value to Chipotle’s market cap, but it will make the stock easier to manage — especially for retail investors with tight stock-buying budgets. Some of us had to save for months before we got a single share of Chipotle today, and some of the most popular stock brokers haven’t even gotten a fractional trade yet. But after the suggested 50-to-1 split, the stock price should drop to about $62 by the morning of June 26.
Chipotle stands out in the restaurant industry for many reasons. In an era of widespread franchising, Chipotle insists on store ownership to control product quality and employee relations. Its career-oriented management style reminds me Costco‘s (NASDAQ: COST)complete with generous employee benefits and solid pay scales.
The incoming stock split suggests that Chipotle’s leadership expects its stock price to continue to rise in the near future. The company’s focus on product quality and humane employee relations set new standards for the restaurant sector.
I personally can’t eat at Chipotle – the cilantro tastes like soap – but it’s an undeniably great company, and the stock split makes it more accessible.
Why Costco should consider a quick stock split
Speaking of Costco, the wholesale retailer should consider splitting its stock now.
Costco is no stranger to stock split operations — it’s been around for a long time. The last stock split was a 2-for-1 affair on January 13, 2000. Costco shares have returned a total of 2,450% since then, leaving S&P 500 (SNPINDEX: ^GSPC) index far behind with only 477% gain:
Like Chipotle, Costco is known for its employee-friendly environment. Kirkland’s store brand product selection is often indistinguishable from the name brand selection. In fact, they are often made in the same factory, by the same producer in the market, but packaged under the Kirkland label and sold at a lower price.
And Costco runs retail operations near the break-even line. This company is quite profitable, thanks to the member shopping system. Annual fees accounted for 1.9% of Costco’s total revenue in last month’s third-quarter report, but also accounted for more than half of the company’s operating profit.
Currently, Costco has not announced a stock split or arranged for a shareholder vote on the idea. But with the stock price crossing the $800 mark last week, the stub is getting a little tougher. Certainly Costco’s board of directors made the stock more accessible to individual investors — including the workers themselves.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chipotle Mexican Grill and Costco Wholesale. The Motley Fool has a disclosure policy.
Watch-Split Watch: 2 Household Name Stocks That Look Like They’re Ready to Split was originally published by The Motley Fool