William Smead
Chief Executive Officer
Chief Investment Officer
Dear Clients and Prospective Clients:
I don’t know if anything annoyed me more back in the 1990’s than the enthusiasm investors had for a company’s stock when it announced a stock split. Stock splits have a tendency to be authorized after large price appreciation has occurred. Splitting the stock only benefits investors if the stock rises after the split and is many times a sign of bravado on the part of the company. Numerous company stock splits are historically a sign of an over-heated stock market.
Another sign of an over-heated stock market are hot trading initial public offerings (IPO). When the stock market is in a sustained uptrend, underwriters take advantage of the confidence of investors and bring companies public. Many times a rabid following develops and a bit of a game follows. Investment firms manufacture new public companies and investors gorge on them with enthusiasm.
Why am I bringing up two phenomena which are almost non-existent? The fact that they are non-existent adds to the evidence that we are forming a market bottom. I can’t remember the last time that a company in our consciousness did a stock split. New public offerings of common stock are off the low end of the charts in the last year. Between the disappearance of large stocks like Wamu, AIG, Fannie Mae and Freddie Mac and the lack of new companies going public, supply and demand for shares is being brought into equilibrium by shrinking supply. There is very little demand at the moment for common stocks and won’t likely be any until the “Next Great U.S. Stock Market” explodes to the upside.
Lastly, what makes me think of this are friends and clients who used to call me with excitement to tell me about a hot IPO or that companies like Microsoft and Starbucks was going to split their stock. They always wanted to know if they should buy some shares in the IPO or buy some shares in the company which was splitting. I would say no and they would leave the call a bit sullen. Those same friends and clients are sending me doomsday news reports and website links. Is their pessimism today going to be any more effective over the next three to five years than their enthusiasm was back then? At Smead Capital Management we try to avoid over-heated securities and doomsday scenarios even if our holdings make us look foolish for an extended time.
Best Wishes,
William Smead
