Stock Split & Buyback Program
Amazon Announces 20 for 1 Stock Split
On Wednesday of last week, Amazon’s board of directors approved a 20 for 1 stock split. What does that mean? It means if you currently own 1 share of Amazon you will receive an additional 19 shares. At the time of this newsletter, Amazon shares are around $2908 per share. If the stock were to split today that would mean an owner of 1 share would have 20 shares valued at roughly $145 each.
Is a stock split good? From a value standpoint, a stock split is neither good nor bad. If we had a large 8 slice pizza, cutting the same pizza into 16 slices doesn’t increase the total amount of pizza. We would have the same pizza with smaller slices. Why do stock splits often result in share prices increasing after the announcement? Investors don’t always care about math. Regular stocks split don’t occur in stocks that nobody cares about. They occur in popular stocks whose share prices have risen higher than many investors can afford to pay. Amazon is a perfect example. There are some retail investors that don’t feel comfortable paying $2908 for 1 share of a company. By splitting the stock, the share price becomes more palatable for more people which, in theory, may increase demand for the stock.
In the case of Amazon, the stock split announcement was not the only reason why the share price rose. The company also announced that it would buy back as much as 10 billion of its own stock. Stock buyback programs are typically good for investors because the company, which typically has large purchasing power is helping create demand for the stock. Investors may also look at a buyback program as signs that the company believes shares will be more valuable in the future than they are presently. In my opinion, many companies botch their stock buyback programs because they choose to buy their own stock when it has risen significantly. I personally think Amazon is executing a buyback at an opportune time because its stock price has fallen in the past 6 months from a share price of around $3700. While the media has been focused on negative news, Amazon’s recent quarter has shown it is still a rapidly growing company.
Tax documents available on SEI
The last of the 1099-DIV tax documents will be available by March 15th. We have been checking them daily and most of our account holders will find they are currently available online. Some of you have requested that we email you those tax forms and we will begin doing so Monday the 14th for those available. If you would like us to email those documents to you and you have not requested we do so, send Macy an email at mvogel@crosbyadvisory.com
How we successfully navigate a stock market correction
A stock market correction is defined by a drop in market value of at least 10%. At the time of writing this newsletter the S&P 500 is down about 12% since January 1st. We expect a stock market correction 1-2 times per year. Whenever a correction occurs, investors naturally begin asking the question is this a correction or the start of a recession? A recession is defined by two consecutive quarters of economic decline as measured by Gross Domestic Product (GDP). At the present moment Crosby Advisory Group does not feel we are close to entering a recession. Many analysts have lowered expectations for GDP growth in 2022 but they are presently still positive expectations. As a result we are presently treating the recent downturn as a correction. What is the typical game plan?
Make no major changes in allocation. The Federal Reserve had telegraphed interest rate increases and bond purchase tapering since 2021, which spelled headwinds for growth stocks. The large volume of spending we have seen in recent years by the U.S. government has been a perfect recipe for high inflation. By January, we had already reduced some exposure to growth stocks, boosted gold and commodities which typically increase in uncertain and high inflationary times. At this point making significant changes to stock positions would likely result in realizing a loss that could be avoided with patience. If the news of the day brings anxiety, the secret to navigating a correction is often to turn off the news and focus things for which we are thankful. Yesterday I paused for a moment as I realized my children, their cousin, aunt, uncle, grandmother and grandfather were all together enjoying each other’s company. We have much for which to be thankful.
Small changes are encouraged. We use dividends and interest to make small adjustments to the models. In a correction, most investors look for some relief, so monthly dividends and interest are be directed into areas that do well in an economic downturn (commodities, gold, in the present downturn oil and energy). If you look at your investment account there should always be something in there that you could sell at a gain if you need money from the account. This strategy also allows the account to be rebalanced in the future to take advantage lower prices in assets that were reduced because of the correction.
Journal. We build investment strategies for bad times, not good times. Most people do not enjoy market downturns. However, there is a difference between concern and anxiety. With history as our guide, eventually the stock market will rise again. I always recommend writing down your thoughts, not in good times, but in bad times. If you need to make your account more conservative, the time to do that is after the market recovers from the correction. It is my hope that after you experience a few corrections, you begin seeing a cycle that occurs repeatedly. Those who treat each correction as a recession ultimately panic and end up selling their investments at discount prices to those who have the ability turn off the news and let their strategy work.
Disclaimer: This newsletter is for informational purposes only and represents the opinion of Crosby Advisory Group, LLC. This newsletter does not replace one on one consultation. Investing involves risk including the potential loss of principal. Understand all risk and fees before investing. Employees of Crosby Advisory Group, CAG Marketing and NMD Insurance may own investments mentioned in this newsletter.
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