Apple Season – August 2020

Although October is officially “Apple Month”, July and August have been good months for Apple(s) as well. 

On July 30th Apple announced the results of their third quarter earnings . The earnings report was beyond, way, way, way beyond “expectations”. 

So much for the analysts, although optimism on any front during the first months of COVID would not be expected.

Included in the earnings report Apple announced a four for one stock split. If you own Apple stock, for every share you own, you will receive 3 additional shares.

The closing stock price on July 30th was $384.76. 

On August 26th, the stock price closed at $506.09. 

An increase of over 30% in less than 30 days. 

Why are investors pushing up the price of the stock ? Does it have anything to do with the stock split?

Stock splits are not as common today as they have been in the past. An honestly I am glad.

Before the days of Robinhood investors and the rise of fractional share trading, stocks were bought and sold in “round lots” of 100 shares.

Brokers charged commissions on trades in addition to a transaction fee. Buying a round lot of 100 shares got you a discount on the transaction fee.

Buying an “odd lot” , anything under 100 shares , would increase your transaction fee.

Is it any wonder so many people were excluded from investing in the markets?

If a stock traded at $100.00 per share and you had to purchase 100 shares, your cost before commissions and fees would be $10,000.00.

Some companies realized that a rising stock price would continue to exclude investors.

Excluding investors meant fewer people trading in the stock. Fewer people trading in a stock means less liquidity for shareholders. There must be buyers and sellers for the whole market thingy to work.

Splitting a stock doesn’t change the market value of your holdings.

If you own 1 share of Apple at $400.00, after a 4-1 stock split you own 4 shares worth $100.00 each. The value of your investment has not changed. 

If I ask you to take an apple and slice it into 4 sections, you still have the whole apple.

Splitting a stock means there are more shares to trade, increasing the number of shares outstanding. 

There is a psychological element to a stock split. By effectively lowering the price of the stock, the stock becomes more attractive to buyers who could not afford one share, let alone 100 shares.

Another impact of a stock split is that it sends a signal to the markets that the company believes it will continue to do well. I think that is the case with Apple and the current runup in price.

I checked out the Apple Investors FAQ. I was curious how many times the stock has split. Investor.apple.com/FAQ

“Apple’s stock has split four times since the company went public.

The stock split on a 7-for-1 basis on June 9, 2014 and split on a 2-for-1 basis on February 28, 2005, June 21, 2000, and June 16, 1987”

• June 16, 1987 the stock split 2 -1. If you owned 100 shares you now have 200 shares.

• June 21, 2000 the stock split 2-1.  If you owned 200 shares you now have 400 shares.

• February 28, 2005 the stock split 2-1. If you owned 400 shares you now have 800 shares.

• June 9, 2014 the stock split 7-1. If you owned 800 shares you now have 5,600 shares.

• August 31, 2020 the stock splits 4 -1 . If you own 5600 shares you now have 22,400 shares [1].

Let’s assume the price on August 31 , 2020 is $500.00 per share. Owning 22,400 shares,  the value of your Apple stock is $11, 200,000.00. As in , eleven million two hundred thousand dollars.

Of course, your holding period from the initial public offering in 1980 is 40 years. 

The problem with this rosy picture is the historical stock price. Apple barely traded above $1.00 per share from 1981 to 2004. 

During the dot com bust in 2000-2001 it traded below $1.00 per share and the survival of Apple was questionable.

In 2004 the stock price traded above $3.00 per share.

In 2008 the stock price hit another low trading just below $12.00 per share.

The point of all this fascinating price history is that an early investor in Apple had to wait 

 28 years (1980-2008) to see any significant gains in the price of the stock.

The second point is that the first three stock splits occurred when there was little indication that the company would survive.

No one buys a stock today expecting to wait over 20 years to see a return. 

“Hey” says your broker “ I have this great company to show you, the stock is only $1.00 per share but if you wait 20+ years you could be a millionaire”.

“Right” you say in 1980 “sign me up”.

Over the course of 20 + years, your broker is gone, the brokerage firm is gone, and the stock is still $1.00. Great investment.

Nobody was “irrationally exuberant” about Apple stock for a very long time.

When the stock splits on August 31, it will still be an expensive stock priced over $100.00 per share.

Buy a few shares? Sure, why not? Expect to become a millionaire overnight? No.

[1] Assumes no reinvestment of dividends and holding the first 100 shares purchased in 1987. A holding period of 33 years.

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.