Reverse splits: How to shore up prices for unloved stocks

Men have a lot of difficulties. Just bringing home bread, being home and loving your partner is not enough these days.

They still have to answer weird questions like “Would you still love me if I were a worm?” Of course, the wrong answer is no. Why do they want war in their backyard?

People are forced to devote all their energy to fighting a government that is out of touch with reality on the ground. But you realize that the real issue is not the worm. It is just a convenient substitute for all the other things that can go wrong or worse in our lives: losing a job, gaining 40 pounds, getting cancer, losing a parent or sibling, having a miscarriage, the list goes on.

The same goes for stocks. If the fundamentals didn’t change, you’d stick with the same stock through its ups and downs, right?
I believe some listed companies (which are doing well under the current circumstances) are unfairly trading at significantly low share prices.

They don’t get the “unconditional love” they deserve.

But they do have options to support interest; buybacks, mergers, refinancing, etc. Reverse stock splits are another option. They are not used very often and tend to get a lot of bad press.

There’s the point that reverse splits tend to go hand in hand with low-priced, high-risk stocks. Then there’s the impression that companies using this approach are desperate for cash – a big red flag. Additionally, some believe that this approach doesn’t address other factors, which could impact a company’s valuation.

Frankly, this is all fair criticism, but the same goes for other alternatives. Investors have an equal chance of losing their money.

So my direct advice is that strong but unloved and undervalued companies should consider this alternative just as much as I encourage investors to back companies that choose to do so.

In addition, there are good reasons for both cases. For companies, a rising stock price may send a signal to the market that the company is worth investing in.

Specifically, this may attract some institutional investors who may not buy stocks priced below a certain amount.

For investors, the option may actually create new opportunities for growth and strengthen the company financially (but this will depend on taking other measures). For example, if the company is also taking steps to reduce its debt burden or improve earnings, a reverse stock split may lead to long-term benefits in terms of pricing.

In short, whether you think reverse stock splits are good or bad is up to you. Whether these unfavorable entities choose to artificially boost their stocks is also their choice. But clearly, some of these stocks deserve better analysis and appreciation from investors at their current prices.

Of course, the big caveat here is that the fundamentals are still strong and will remain so going forward. Overall, if the core of these companies doesn’t change, they deserve our “permanent” commitment at this point in time. Even if they turn into worms.

Mwanyasi is MD, Canaan Capital

PricesReverseShoresplitsStocksunloved
Comments (0)
Add Comment