Stock Splits

06/24/14 02:14:11 PM

by Koos van der Merwe

Whenever a company announces a stock split, I look to buy shares of the company's stock.

Security: CELG
Position: Buy

Stock splits do not create any fundamental change on the surface but when a share price runs up strongly, daily average volume falls. Historically stock splits create excitement around a stock simply because it means that at a lower price, more players enter the market and play the share. Splitting shares does not always create a certainty that trading volume will rise, but they could tighten the bid-ask spread narrowing the difference between the price paid and the price received by an investor.

The board of directors at Celgene Corporation (CELG) recommended a two for one stock split. On June 18, 2014 at the annual meeting of its shareholders, approval for a two-for-one stock split was granted. Shareholders as of June 18, 2014 will get an additional share for each share they currently hold. The shares will be distributed on June 25, 2014 with the adjusted stock price reflected on June 26, 2014. So do you buy the share now expecting the share price to rise going forward to June 26, 2014?

Figure 1. Weekly chart with Elliott Wave count suggesting a WAVE 5 in progress.

Graphic provided by: AdvancedGET.

The weekly chart in Figure 1 shows how the shares have risen from a low of $37.68 on April 17, 2009 to a high of $175.18 by January 10, 2014. The price then fell to $133.07 by April 11, 2014. The share price then started rising possibly as investors anticipated the announcement of a stock split. The Elliott Wave count suggests that the share price could be rising in a WAVE 5. The Probability Index (PTI) is 40, which is not that strong but a PTI greater than 32 is a good sign. Note the RSI indicator which gave a buy on April 11, 2014?

Figure 2. Daily Omnitrader chart showing Vote line buy signal.

Graphic provided by: Omnitrader.

The chart in Figure 2 is an Omnitrader chart showing where the Vote line gave a buy signal on April 25, 2014 when the share price was $142.06. The Vote signal on the Vote line is the result of buy signals given by the four strategies shown in green below the Vote line. Obviously this was in anticipation of the announcement of the stock split. Is it worth buying the stock at the current price of $171.46? Volume is rising and neither of the two indicators shown (the IndTDJak and the indRSI) have given sell signals, suggesting that once the split occurs, the stock price could rise further.

Whenever a company announces that it intends to have a stock split, it is always worth buying the stock, and then sell the stock on the day the split occurs. Buying CELG stock now may be too late, but the stock could rise a little bit higher before the split on June 26, 2014.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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