On June 26, restaurant company Chipotle Mexican Grill (NYSE: CMG) did a 50-for-1 stock split — one of the largest splits investors have ever seen. Everyone who previously owned just two shares of the company now owns 100, thanks to this much-hyped event.
However, Chipotle shares are down about 11% from their all-time high reached in June, with much of the decline coming after the stock split. It’s actually the biggest drop for Chipotle stock in nearly a year.
I have reason to believe that some Chipotle shareholders have bought the stock outright because of the stock split. A 2023 study published in the Journal of Risk and Financial Management found that a stock’s trading volume tends to increase following an announcement of a stock split. And trading volume tends to increase enough after a split that it’s reasonable to assume that there are more shareholders after the split than before.
That’s why I think some investors are holding Chipotle stock because it just did a huge 50-for-1 split. And those investors are probably upset that they’re already down a lot.
Why Isn’t Chipotle Stock Rising After the Split?
The true value of a company is not found in its stock price, but in its market capitalization. Each share represents a small, fractional ownership of the company. Market capitalization adds up the price of all outstanding shares to arrive at the whole value of the company.
Let’s say two different stocks are both trading at $10 per share. If the first company has 1 million shares and the second company has 1 billion shares, the first company would have a market cap of only $10 million, while the other company would have a market cap of $10 billion. In other words, their stock prices would be the same. But one company would be worth 1,000 times more than the other, because it would have 1,000 times as many shares.
When Chipotle split its stock, it immediately had 50 times as many shares as it had before. But it did nothing to create shareholder value, and it didn’t lose any value. That’s because the stock price was also immediately about 1/50th of what it was before. In other words, it was all a wash from a market cap value perspective.
It may not have created shareholder value with the stock split, but Chipotle did creating a lot of buzz. From the time the split was announced to the time the split actually happened, Chipotle stock outperformed the S&P 500 by a wide margin — investors were clearly excited.
Now that Chipotle’s stock split is behind us, the excitement has died down, leading to a lower stock price.
what to do now
Don’t get me wrong: It was never a foregone conclusion that Chipotle stock would rise with the split announcement and then fall. Investor sentiment can move stock prices in any direction in the short term, and sentiment is inherently unpredictable.
The practical lesson that investors can learn from this is that there are things that can affect the price of a stock in the short term. But sometimes these are things that don’t really create value, such as stock splits. Therefore, these are not things that should require any attention.
Instead, investors in Chipotle (and other stocks) should develop an investment thesis — a concise explanation of how a company can create value in the years ahead. As an investment thesis plays out, market sentiment will rise and fall, creating volatility in a stock’s price. But those who stay calm during the volatility can be rewarded with big gains.
In the long run, the more important things like revenue growth and margin improvements have a much bigger impact on a stock’s price than a split. And because this is true, long-term investors should focus on those things.
For Chipotle shareholders who only bought shares because of the stock split, I’d say do more research before deciding whether this is a stock you want to own for the long term. But let me give you a head start by explaining why the company can at least grow its revenue.
Chipotle owns all of its U.S. restaurants, with nearly 3,500 at the end of the first quarter of 2024. However, it plans to open hundreds more locations in the coming years. Since these will also be company-owned, it’s likely that the company’s revenue will grow significantly. And revenue growth is one of the most important things for a winning stock.
For Chipotle shareholders who have an investment thesis outside of the stock split, take heart that fundamentally nothing has changed for the company. The shares have simply fallen because sentiment adjusts, as they always do.
Don’t miss this second chance at a potentially lucrative opportunity
Ever felt like you missed the boat on buying the hottest stocks? Then you want to hear this.
In rare cases, our expert team of analysts provides a “Double Down” Stocks recommendations for companies they think are about to explode. If you’re worried you’ve already missed your chance to invest, now’s the best time to buy before it’s too late. And the numbers speak for themselves:
-
Amazon: if you invested $1,000 when we doubled in 2010, you would have $22,525!*
-
Apple: if you invested $1,000 when we doubled in 2008, you would have $41,621!*
-
Netflix: if you invested $1,000 when we doubled in 2004, you would have $366,492!*
We are currently issuing “Double Down” warnings on three incredible companies, and there may not be another opportunity like this anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns as of July 2, 2024
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The stock split is over for Chipotle Mexican Grill, and shares are quickly down more than 10%. What it means for investors. was originally published by The Motley Fool
