Making the Best out of Reverse Splits

What is a Reverse Split (RS)?

A reverse stock split is simply an action that consolidates the shares of a company into fewer, but proportionally valued shares. Essentially, the number of shares are divided by a pre-determined ratio, and although your position (if you held into the RS) has the same $ value, you end up with fewer shares at a higher price. It all boils down to the reduced float of the stock in the aftermath, which means more volatility and upside to profit. This is what we want! You can learn more about outstanding shares and floats HERE.

For example: $ABC trades at $0.40 per share and you own 1000 shares, thus valued at $400. The company then decides to enact a 1-for-10 reverse split, so the new price then becomes $4 ($0.40 multiplied by 10), with your total new number of shares now becoming 100 (1000 divided by 10). So, same value of $400 (100 times $4), but a different price and reduced number of shares.

Companies generally do this to boost their share prices and attract bigger/more investors since their share price is now higher and deemed more attractive; other times, these companies do it to meet the price or equity requirement set forth by NASDAQ

How to Find them

Generally, a lot of these reverse stock splits are announced through a press release, while other times, they are announced by means of a sec filing. My favorite outlet for sorting through these filings is FINTEL.io. All you need do is go to the SEC Filing tab and look for a possible Form 6k or Form 8k for company/stock updates.

SEC

You may also use Nasdaq site to locate upcoming reverse stock splits. On the website, click ‘Market Activity,’ after which you then select ‘Stock Splits.’ I have made it easier for you, so click HERE

Nasdaq

Are Reverse Splits Bullish?

The answer to this typically depends on how well you play them; however, in the short run, not so much, and in the long run, it presents a massive opportunity. It’s bad in the short run simply because of the stigma that’s associated, thus the share price starts to drop dramatically the moment the news of a RS gets out–but there’s nothing to fret about because, as the next section talks about how to make huge profits from them in the long run. Remember, the stock market is all about sentimentality and perception, so RS stocks generally start to fall the moment they are announced, as people find it to be bearish (but it’s not).

How to Play them

The first thing I do is divide the current float by the ratio of the RS just so I know what the post-split float would become. This is important because the lower the float, the bigger the potential of that stock. Ideally, I like a post-split float of 2m and under, with my position size commensurate to the size of the float. If the float would be 1m and under, the stock typically runs a day or two into the reverse split, and also on the day of the RS, even if it’s a brief 20%-40% move. The main play is after the RS, and what I typically do is accumulate on the subsequent days after the RS–on a daily basis for about three days, as that’s typically how long it falls before it starts to tick up. The RS stocks with the lowest floats tend to run about a week after the RS, so take advantage of the daily drop in share price and accumulate.

I prefer NASDAQ stocks to AMEX/NYSE RS stocks because they trade better…NYSE stocks tend to take longer for their post-RS run and are more susceptible to being manipulated. Moving on, if you intend to buy 1000 shares, as an example, buy 300 shares on the first 10-20% drop (usually day 1 of the RS), and then another 300 or so on day 2, and so on. This way, you average down while trying to get your full position, and even if the stock decides to run prematurely, you wouldn’t miss out. You may also decided to wait altogether and buy your full position after a week, but the risk there is that you might miss the run. What happens after a few days is one of two things:

  1. Either you get a PR/news that runs up the stock 50%+
  2. Or you find volume starting to creep in since people are realizing how low the float is after the RS, thus buying and running up the stock price 30%+

Remember, the lower the share float of a stock, the higher the potential of said stock when it runs. 

 

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