Last Tuesday, Netflix (NFLX) made all of my Tradette dreams come true. The streaming company announced it approved a 7 for one stock split. (Well, that and I finally finished the latest season of Orange is the New Black. Holy moly). The stock split means that Netflix shareholders will get 7 shares for each of their 1 original shares, at 1/7th of the value each.
For example, if I hold one Netflix share worth $700, I’ll now get 7 shares worth $100 each. The new shares start trading on July 15th.
I’ve been acquiring more Netflix shares over the past couple of months, but I loaded up on a few more after the announcement. I’m incredibly bullish on Netflix, and even more so after the stock split announcement.
Let me clarify first – I’m not ONLY buying Netflix because of the stock split. That would be a terrible idea. Regardless of the split, I believe in Netflix’s growth potential. I think it has a fantastic product, will gain domestic customers as generations of kids graduate college and move out sans cable, and has room for international expansion. Not to mention, it has major cable companies running scared, which is a good sign.
Not to mention, I learned the hard way not to bet against Netflix. Netflix’s upcoming stock split just makes me even more optimistic.
Before I get ahead of myself, I should point out that technically, a stock split shouldn’t affect a stock’s price at all. The stock split just like taking a pizza and splitting it into 7 slices – you have the exact same amount of pizza as you did originally.
And this would be the case if investors always behave rationally, in accordance with the principles of finance. The good news here? Investors rarely do.
You see, some investors get very confused about what “expensive” means. Many investors confuse the dollar value of a stock with how expensive it is. In fact, I’ve heard a few friends tell me that they don’t want to get into Apple (AAPL) or Netflix because they’re too expensive. While that’s not technically true (and read here for part one of this post – my explanation of whether Netflix is actually expensive), it’s a psychological barrier that keeps us from investing.
But we can take advantage of that feeling. Because when Netflix’s stock price decreases on July 15th, it suddenly becomes more affordable for all of the investors who incorrectly thought it was expensive. It’s basic supply and demand: the price goes down, therefore demand goes up, and then increased demand drives the price up again.
Let’s look at what happened to Apple when it initiated a 7-for-1 stock split a year ago. [Note: While you should never ever base your decision to buy one stock on a different stock’s historical performance, it helps to have an example.]
Apple announced its 7-for-1 stock split back on April 23, 2014, and the stock closed that day at $74.96 (split adjusted). By the time the stock split took effect, the shares were up 24%, to open at $92.70. Yesterday the shares closed at $124.53, a 34% improvement since the split took effect, and 66% gain since the split was announced.
Again, I’m not saying the same monster gain will happen to Netflix. But I’m betting that we’ll see at least some of that increase.
The best news about all of this? You can use my advice to avoid making the same mistake I did. You see, I bought my shares too early. I bought right after the stock split was announced, and paid $704 a share. But I’m putting out this post today so you can be smarter.
Since I bought my shares, Netflix has been down about 8%, to close at $645.62 yesterday. That’s because Netflix got hit with a one-two punch in the past week.
First, Carl Icahn decided to follow up on Netflix’s stock split announcement with a Twitter announcement of his own (surprise, surprise). He announced that he had sold all of his substantial Netflix position. That caused many investors to follow suit. You might not have heard of him, but to portfolio managers, it was almost the same as Warren Buffett saying he’d sold out. Many investors tend to listen.
Then the stock market was down overall yesterday in the wake of Greece’s financial crisis. You can read some context here, but in a nutshell, bailout talks broke down this weekend. That means Greek’s bailout money is looking less secure, and Greece had to shut down its banks this week amid fears they can’t make good on all the money consumers want to take out. As a result, Greece could be forced to exit the euro, and a whole boatload of financial instability could take place in the region. Unsurprisingly, threats of economic instability sent the stock market spiraling down.
The thing is, neither of these causes for Netflix’s price drop have anything to do with Netflix’s core business. Therefore you can take advantage of the drops to buy in to Netflix before the stock split, and at a lower price.
It’s a win for everyone! Well, except Greece.