Invest and Trade Profitably with Jon Johnson

My favorite stock is Openwave (OPWV). Recently they have decided to vote on a reverse stock split. Do you ever play a reverse split? What are the trends of a reverse split? Are they the same as a regular split? What do you think about this particular stock?

August 30, 2000

In the most general sense it is typically not a good sign for a stock to announce a reverse stock split. What a company is doing is taking the outstanding number of shares and reducing them by converting say 4 shares into one share (a 1:4 reverse split). That immediately boosts the share price as one share is now the price of four shares at the pre-split price. It is usually a defensive move taken to stay listed on an exchange or otherwise generate price stability (at a higher level), something the company has been unable to do on its own in the market. The split itself does not change the fundamentals, and without more it rarely has the desired effect in that most reverse split stocks find themselves below their post-split price within 12 months.

That is not always the case. A general market rally can help as we have seen in the past 10 months. Many stocks that reverse split their stocks have enjoyed nice gains along with the rest of the market. More than that, however, when making the decision on the stock you have to look and see if there is anything else going on that could cause price appreciation after the split is effective. Is there new management, increasing sales, new relationships, etc.? MSTR was one of the early reverse split success stories last year. It reverse split but also announced some changes, some agreements, and some improving financial numbers. Those along with the reverse split helped jumpstart MSTR and made it an early leader in the rally and the stock had a good run over the next several months.

As far as hanging onto a stock as it approaches its reverse split effective date, if it is moving well before the split it is worth letting it run. During the long downtrend reverse splits were a signal for shorts to enter the market. Now with the uptrend, stocks that are working well into a split may continue that action into and after the split.

As for OPWV, what an explosive breakout from that 8-month base! Right now it has run pretty far and needs a test. Shows excellent accumulation recently. This recent base is part of a HUGE one that dates back to early 2000, and it looks like there might be some possible resistance starting around $5. That comes from a lateral consolidation the stock was moving in spring-summer of 2002 (the company made an earnings announcement that sent the stock gapping down), but that is getting dated at this point. Other than that, OPWV is moving well and there is no reason to bail out of it heading into a reverse split given that it is enjoying very solid action.

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