The Trader -- Barron's Online


February 1, 1999

Stocks Surge on Market's Split Opinion

By Andrew Bary

Vital Signs It's a measure of the speculative mood in the market these days that many investors are more interested in whether a company is splitting its stock than in any fundamental news on profits or revenues.

Major market indexes surged last week, with the S&P 500 and Nasdaq Composite hitting new highs Friday. The Dow Jones Industrial Average rose 238 points to 9358, capped by a 77-point gain in Friday's session. Yet the Dow's 2.6% advance in the week trailed both the S&P and Nasdaq, which were up 4.4% and 7.1%, respectively. The Dow continues to be weighed down by lumbering industrial stocks like DuPont, Caterpillar, and International Paper These companies are showing punk profits and thus are being shunned in a market obsessed as never before with earnings momentum.

These lagging industrial issues, however, have little impact on the S&P, which is dominated by large technology, telecommunications and drug stocks. Several of the market's leaders, including Microsoft, Intel, Pfizer and America Online, announced stock splits last week, stoking investor interest in their shares. Microsoft rose 18 3/4 to a record close of 175 on Friday, giving it a stunning market value of $475 billion. Microsoft now is up 26% in 1999 and 136% in the past 12 months. Intel gained 12 1/8 to 140 15/16 in the week; America Online advanced 35 1/4 to 175 3/4, and Pfizer was up 12 7/8 to 128 5/8, pacing the strong drug group.

A stock split, of course, creates no value for shareholders, but a growing number of investors buy shares in companies that take such action, in the view that the splits signal a confident outlook from management. Perhaps a bigger reason for split-based investing is that it has worked magnificently in the past year because it has steered investors into the hottest sectors of the market, especially technology, where splits have been abundant. AOL, for instance, split its stock twice in 1998 and rose more than sevenfold in price.

Old-timers can't believe it when they see headlines like "Intel shares rise on stock-split news." But that's the way the market is now. So popular is split-based investing that some firms now provide beeper alerts about stock splits and handicap the prospects for future splits. One service, the Right Line Split Report, based in Round Rock, Texas, put out a press release last week lauding its "unsurpassed record of predicted stock splits this year." Candidates for stock splits include Cisco Systems, Lucent Technologies and virtually any hot stock with a price over $100 a share.