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Reverse splits: How to shore up prices for unloved stocks

Reverse splits: How to shore up prices for unloved stocks

Men go through a lot. Just bringing bread home, being present and loving your significant other is not enough these days.

They still have to keep up with weird questions such as “would you still love me if I was a worm?” Of course, the wrong answer is no. Why would they want war in their own yard?

They’ve got to reserve all energy to fight with a government that’s out of touch with the reality on the ground. But you realise the real question is not about the worm. It’s just a convenient stand-in for all other things that can, and will go wrong throughout the course of our lives: a job loss, 40 extra kilogrammes, cancer, losing a parent or sibling, miscarriage, the list goes on.

Same situation applies to shares. If the essence hasn’t changed, you’d stick with the same share throughout its highs and lows, right?.
I believe some of the listed companies (doing well under the circumstances) are unfairly trading at substantially reduced share prices.

They are not getting the “unconditional love” they deserve.

But they’ve got options to shore up interest; buyback, merger, re-financing et cetera. A reverse stock split is another option. It doesn’t get used a lot and tends to get a lot of bad rap.

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 the approach are desperate for cash – a major red flag. Plus some believe that it does not address other factors, which may impact the company’s valuation.

To be frank, all this is fair criticism but the same applies to the other alternatives. Investors stand an equal chance of losing money.

My pedestrian advice is, therefore, that solid but unloved and undervalued companies should consider this alternative just as much as I’d encourage investors to stand by those choosing to do so.

Just to add, there are good reasons for both instances. For companies, a higher share price could send a signal to the market that the company is worth investing in.

Specifically, this may appeal to certain institutional investors who might not buy stock priced below a certain amount.

For investors, the option may actually create new opportunities to grow and strengthen the company financially (but this will be dependent on taking other measures). For instance, if a company is also taking steps to reduce its debt load or improve earnings, then a reverse stock split could yield long-term benefits with regard to pricing.

To summarise, whether you think a reverse stock split is good or bad, that’s down to your choice. Whether these out of favour entities elect to artificially shore up their pieces, that’s also their choice. But what’s evident is that some of these shares deserve better analysis and investor appreciation at current pricing.

Of course, the big disclaimer is that the fundamentals are still strong and will hold into the future. Generally, if the essence hasn’t changed, these companies deserve our “undying” commitment at this time. Even if they were to become worms.

Mwanyasi is MD, Canaan Capital

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