Foolish Stock Splits Can Hurt

Corporate management at times makes the mistake of excessively splitting
its company's stock. This is sometimes done based upon questionable
advice from the company's investment bankers.
In rny opinion, it is usually better for a company to split its shares 2-'
for-1 or 3-for-2, rather than 3-for-l or 5-for-l. (When a stock splits 2-for-
1, you get two shares for each one previously held, but the new shares
sell for half the price.)
Overabundant stock splits create a substantially larger supply and may
put a company in the more lethargic performance, or "big cap," status
sooner.
It is particularly foolish for a company whose stock has gone up in
price for a year or two to have an extravagant stock split near the end of
a bull market or in the early stage of a bear market. Yet this is exactly
what most corporations do.
They think the stock will attract more buyers if it sells for a cheaper
price per share. This may occur, but may have the opposite result the company wants, particularly if it's the second split in the last couple of
years. Knowledgeable professionals and a few shrewd traders will probably
use the oversized split as an opportunity to sell into the obvious
"good news" and excitement, and take their profits.
Many times a stock's price will top around the second or third time it
splits. However, in the year preceding great price advances of the leading
stocks, in performance, only 18% had splits.
Large holders who are thinking of selling might feel it easier to sell
some of their 100,000 shares before the split takes effect than to have to
sell 300,000 shares after a 3-for-l split. And smart short sellers (a rather
infinitesimal group) pick on stocks that are beginning to falter after
enormous price runups—three-, five-, and ten-fold increases—and
which are heavily owned by funds. The funds could, after an unreasonable
stock split, find the number of their shares tripled, thereby dramatically
increasing the potential number of shares for sale.