Over the past three weeks, Wall Street’s major stock indexes have sternly reminded investors that stocks don’t rise in a straight line. The iconic Dow Jones Industrial Averagebenchmark S&P500and innovation-driven Nasdaq Composite have all returned at least 5% from their respective record highs.
When volatility and uncertainty rear their proverbial heads, both professional and casual investors tend to seek the safety of proven outperformers. While the “FAANG stocks” have been popular for more than a decade, it’s the stocks that trigger splits that investors — included members of Congress – have really flocked in recent years.
Investors have been attracted to stock split stocks
A “stock split” is an event that allows a publicly traded company to cosmetically change its stock price and the number of shares outstanding by the same factor. I say “cosmetic” because stock splits have no effect on a company’s underlying market capitalization or business.
A forward-stock split is used by publicly traded companies to make their shares nominally more affordable to ordinary investors. This can be especially useful for investors who don’t have access to fractional share purchases. Meanwhile, a reverse stock split increases a company’s nominal stock price to ensure continued listing on a major stock exchange.
Although there have been cases in the past where companies that have done a reverse stock split have made their shareholders richer (e.g. Bookings of holding companies), most investors are focused on forward splits. Companies whose stock prices are soaring tend to innovate better and outperform the competition. In other words, these are exactly the kinds of companies we expect to increase in value over time.
Since mid-2021, nearly half a dozen leading companies have completed a forward split, including Amazon, Alphabet, Nvidiaeven Walmartwhich took place earlier this year.
When an outperforming company announces that it will join this elite group of stock splits, investors generally flock. But that hasn’t been the case for one of Congress’ most active traders when it comes to skyrocketing stock prices. split shares.
This historic stock split is being sold by one of Congress’s most active traders
Since its initial public offering (IPO) at $22 per share in January 2006, the fast-casual restaurant chain has Chipotle Mexican Grill (NYSE: CMG) has been a thrilling investment. With shares closing at $2,915 on April 23, that means Chipotle has achieved a total return of 13,150% since its IPO.
But one thing Chipotle hasn’t done in its 18 years as a publicly traded company is conduct a stock split. On March 19, the company’s board of directors announced a 50-to-1 forward split. The magnitude of this split makes it one of the largest in the history of the New York Stock Exchange. Assuming shareholders vote in favor of this split at the company’s annual meeting in June, Chipotle will begin trading on June 26 at a price closer to $60 per share.
Despite this historic stock split, House Rep. Michael McCaul (R-TX), the second most active trader in Congress last year – McCaul completed 1,826 trades in 2023, based on data from Unusual Whales – a seller of Chipotle stock.
Thanks to the STOCK Act, which was signed into law in 2012, members of Congress, along with their spouses and children, are required to report transactions of $1,000 or more no later than 45 days after they are completed. Based on these periodic transaction reports, we can see that after McCaul’s previous purchases of Chipotle stock in late July 2023 and early November 2023, McCaul has sold shares four times this year, ranging from $2,326 per share to $2,598 per share.
While this could very well be simple profit-taking by an extremely active trader on Capitol Hill, Wall Street’s latest stock split also has drawbacks.
Spilling the beans: Chipotle has clear competitive advantages, but is not attractively valued
Chipotle Mexican Grill has built its success on the belief that consumers will pay more for high-quality food. The company sources its vegetables locally where possible, uses responsibly sourced meat that is free from routine antibiotics and prepares its food fresh daily without the need for freezers. Taking these extra steps has made it easier for the company to pass on higher prices to its customers.
Another reason for Chipotle’s success is its fairly small menu. Keeping the number of food offerings relatively small makes it easier for the company’s employees to prepare food and keeps the line moving. Additionally, the introduction of new items can have a greater impact if the number of offers is limited.
Innovation has also played a role for Chipotle – and I’m not just talking about new foods. The introduction of dedicated mobile ordering lines known as “Chipotlanes” has further accelerated the ordering process and added a new revenue stream for the company.
Despite this trio of catalysts, two headwinds could hinder Chipotle’s sizzling stock, or perhaps send the stock tumbling.
The first concern is a persistently high inflation rate. While Chipotle’s most loyal customers have shown a willingness to pay more for their food, rising costs in other sectors of the economy, such as housing, could put pressure on the wallets of the company’s casual customer. If select predictive indicators and money-based numbers are correct, even Chipotle wouldn’t be immune to a US recession.
The other problem for Chipotle is its aggressive valuation. While its clear competitive advantages merit a premium, the company’s shares currently trade at a multiple of 45 times full-year earnings. There is only so much innovation that can be squeezed out of a restaurant chain that offers an organic growth rate from existing stores of around 8% to 10%. The company’s expensive shares, which seemingly leave little room for upside in the coming quarters, could be the catalyst that sets Rep. McCaul tempts to go to the exit.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions at Alphabet and Amazon. The Motley Fool holds positions in and recommends Alphabet, Amazon, Booking Holdings, Chipotle Mexican Grill, Nvidia and Walmart. The Motley Fool has a disclosure policy.
One congressman is going against the grain and selling these sky-high stock splits. was originally published by The Motley Fool
