While Artificial Intelligence (AI) is an extremely popular market trend that has fueled the growth of the economy, Nasdaq Composite and benchmarking S&P 500 to new heights, investor enthusiasm for stock splits has played an equally important role in pushing certain stocks higher in 2024.
A stock split allows a publicly traded company to adjust its share price and the number of outstanding shares by the same factor. Splits are purely cosmetic in the sense that they do not affect a company’s underlying business or market capitalization. Instead, they are designed to increase or decrease a company’s share price, often with a very clear purpose.
A reverse split is intended to increase a company’s stock price, usually with the goal of maintaining a listing on a major stock exchange. Because this type of split is often done by struggling companies, it is a split that investors often shy away from.
On the other hand, forward stock splits lower a company’s stock price to make it nominally more affordable for retail investors and/or employees who cannot purchase fractional shares. This type of split is typically done by top companies that outperform their competitors in innovation and execution. Not surprisingly, this is where most investors focus their attention.
Since 2024, just over a dozen leading companies have announced or completed a stock split; only once was it a reverse split.
Billionaire investors have certainly taken note of the outperformance of the Class of 2024 stock-split stocks. However, their outlook for this group is mixed.
While most investors are fixated on stocks of well-known brands that have been split, such as Nvidia (NASDAQ: NVDA)Billionaire asset managers have quietly dumped shares of Nvidia in favor of two stealthy stock splits.
Wall Street’s smartest and richest money managers are ignoring Nvidia
Although it was Walmart that officially kicked off the stock-split euphoria in early 2024, there has been no more anticipated split this year than Nvidia’s. The AI giant completed its historic 10-for-1 forward split after the close of trading on June 7.
While Nvidia’s AI graphics processing units (GPUs) dominate in AI-accelerated data centers, that hasn’t stopped the nine-month exodus of billionaire money managers from the company’s stock. Based on Form 13F filings with the Securities and Exchange Commission for the quarter ended June, there were seven billionaire sellers, including (total shares sold in parentheses):
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Ken Griffin of Citadel (9,282,018 shares)
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David Tepper of Appaloosa Management (3,730,000)
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Stanley Druckenmiller of Duquesne Family Office (1,545,370)
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Cliff Asness of AQR Capital Management (1,360,215)
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Israel Englander of Millennium Management (676,242)
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Steven Cohen of Point72 Asset Management (409.042)
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Philippe Laffont of Coatue Management (96,963)
While the continued selling activity is partly due to the more than 700% gain since the beginning of 2023, it may be history that is causing billionaires to want to reduce their stakes in Nvidia.
Since the widespread adoption of the internet three decades ago, we have not seen a single much-hyped innovation, technology, or trend escape a bubble early in its life. That is, investors have consistently overlooked how quickly a new innovation would be useful or mainstream. Given that most companies do not have a well-defined plan for generating a positive return on their AI investments, we are likely witnessing the early stages of an AI bubble.
Billionaires may also follow the lead of Nvidia CEO Jensen Huang and other insiders. Huang has been a persistent seller of his company’s stock since mid-June. Moreover, no insider at the company has made an open-market purchase of his company’s stock since December 2020. If insiders don’t see their stock as a good value, why would billionaire money managers think it’s a deal?
The final catalyst behind this sale appears to be increasing competition. In addition to external competitors bringing their AI GPUs to market, Nvidia’s largest customers in terms of net revenue are also developing chips internally for use in their high-performance computing data centers.
Rather than focus on Wall Street’s hottest stock split of 2024, billionaire money managers chose to focus on two of the least-known companies splitting.
Sony Group
The first stock to split that has received only a fraction of the attention Nvidia has, but that investors were waiting to buy shares in during the second quarter, is the consumer electronics supplier Sony Group (NYSE: SONY)Sony’s American Depositary Receipts (ADRs), which split 5-for-1 on Oct. 8, had six billionaire buyers in the quarter ended June (total number of shares bought is in parentheses):
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Ken Fisher of Fisher Investments (847,814 shares)
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Ken Griffin of Citadel (251,987)
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Israel Englander of Millennium Management (71,777)
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John Overdeck and David Siegel of Two Sigma (19,400)
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Cliff Asness of AQR Capital Management (4,573)
Although it’s been nearly four years since Sony introduced its PlayStation 5 gaming console, the company is finding new and innovative ways to drive growth in its consumer-focused gaming segment. In addition to raising the price of its console in Japan to boost sales, it’s enjoying a notable increase in revenue from PlayStation Plus. The subscription service lets users play games with friends, access exclusive games, and save their data to the cloud.
We’re also getting closer to the anticipated release of Sony’s next-generation gaming console. While that release is likely still two years away, it’s not uncommon for investors to anticipate the boost in revenue and profits that console makers experience when releasing new systems.
In addition to gaming, Sony Group’s Imaging and Sensing Solutions (I&SS) segment is enjoying meaningful growth, with revenues up 21% year-on-year. It is a major supplier of image sensors used in next-generation smartphones and digital cameras. In particular, the ongoing rollout of 5G networks by wireless companies and the desire of businesses and consumers to take advantage of these faster download speeds has led to a device replacement cycle that has increased demand for Sony’s products.
The final piece of the puzzle is that Sony’s board of directors has approved the repurchase of up to 30 million shares, which represents nearly 2.5% of the company’s outstanding shares. For companies with stable or growing net income, share buybacks are a way to boost earnings per share and make a company fundamentally more attractive to investors.
Cintas
The other under-the-radar stock split stock that billionaire money managers have chosen over Nvidia is Cintas (NASDAQ: CTAS)The corporate apparel and business services provider completed its largest forward split ever (4-for-1) last week and had four billionaire buyers in the second quarter:
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Israel Englander of Millennium Management (1,117,976 shares)
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Jeff Yass of Susquehanna International Group (164,424)
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John Overdeck and David Siegel of Two Sigma (155,932)
Aside from the excitement surrounding the company’s first stock split in 24 years, the main appeal of Cintas is that it’s cyclical. In other words, it ebbs and flows with the health of the U.S. economy.
While recessions are an inevitable part of the economic cycle, they are known to resolve quickly. Only three of the twelve U.S. recessions since the end of World War II have lasted longer than twelve months, and none have lasted longer than eighteen months. By comparison, most periods of growth have easily lasted longer than eighteen months. By aligning Cintas’s success with the U.S. economy, the company has been able to grow steadily over the long term.
Cintas also has over 1 million corporate customers. By providing everything from uniforms to floor mats, soap dispensers and safety kits, it ensures that no business is critical to its success or able to rock the boat.
The one concern that stands out with Cintas is the company’s valuation. While there’s no denying that bolt-on acquisitions and continued product innovation have helped Cintas maintain high-single-digit growth, its forward price-to-earnings ratio of 45 implies that it’s priced for perfection — something current and prospective investors should keep in mind.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Walmart. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.
Surprise! Billionaire money managers are selling Nvidia shares and doing 2 stealthy stock splits. was originally published by The Motley Fool
