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Alphabet Stock Split: A Win for Retail Investors … And the Dow?

Google parent Alphabet (GOOGL, $2,752.88) briefly added more than $180 billion in market value at the opening bell Wednesday after the search giant easily topped fourth-quarter estimates … and delivered on many investors’ longtime wishes by announcing a 20-for-1 stock split. 

An Alphabet stock split would not only make its A-class GOOGL shares and C-class GOOG shares more accessible to retail investors, but also perhaps open the door for inclusion into the elite Dow Jones Industrial Average one day.

Alphabet announced both the stock split and its quarterly results late Tuesday, resulting in a jump in GOOGL stock of as much as 10% in the first few minutes of Wednesday’s session. That’s the biggest opening gap-up on earnings for its shares since April 2008, when they popped 19.1%, according to data from Bespoke Investment Group.

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As good as Alphabet’s quarterly results were – it earned $30.69 per share on $75.3 billion in revenues, topping respective estimates for $27.34 per share on $72.3 billion – Wednesday’s price action was likely driven every bit as much by news of its proposed share split. 

The Alphabet Stock Split Explained

The communication services behemoth intends to issue 20 shares for each share held of its Class A, Class B and Class C stock (subject to shareholder approval, of course) after the close of business on July 15.

Now, stock splits are meaningless on a fundamental basis. A company’s operations and prospects remain the same. In this particular case, the Google stock split is the equivalent of making change: Shareholders hand Alphabet a $20 bill and get 20 one-dollar bills in return.

But markets love splits all the same, and that seems to be the case yet again with Alphabet’s share split. 

And, to be fair, there are some technical reasons why this 20-for-1 split could give GOOGL stock a tailwind.

Alphabet closed Tuesday’s trade around $2,750 per share. Post-split, that comes to about $138 per share. Although brokerages already offer customers the option of buying and selling fractional shares for free, the split should theoretically make GOOGL more popular with retail investors currently put off by the four-figure share price.

Looking farther out, it also makes Alphabet available for inclusion in the Dow Jones Industrial Average.

Google in the Dow? Maybe, But …

The blue-chip barometer isn’t built like the other two major indexes, and that’s what makes Alphabet’s stock split so important.

The S&P 500 and Nasdaq Composite are weighted by market capitalization: the stock price multiplied by the number of shares outstanding. The Dow, however, is weighted by price. (If that seems weird, just know that the original 12 stock Dow was created in 1896 by Charles Dow, and the guy had to calculate the average every day by hand.)

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One issue with the Dow’s price-weighted construction is that it shuts out any stock trading at GOOGL’s current lofty level. At $2,700 a share, Alphabet’s stock would skew the average into meaninglessness.

UnitedHealth Group (UNH, $468.41), at roughly $475 a share, holds the greatest weight in the average today. Adding Alphabet at $3,000 would turn the Dow into the “Google and 29 Other Stocks Average.”

Also know that it’s up to the Dow’s editors at S&P Dow Jones Indices on whether to add it to the average. That’s not a simple decision. Alphabet is a member of the market’s communication services sector. The Dow has two components from that sector already: Verizon (VZ, $53.20) and Walt Disney (DIS, $144.49). 

Does one of those stocks then get the boot? VZ is the only telecom in the blue-chip average. DIS is the only media and entertainment conglomerate. The editors construct the Dow to reflect the broader economy. Shouldn’t the Dow have a telco and a media giant?

And then there’s the weighting problem again. If Alphabet (at around $140) replaced Verizon (more than $50), the communications sector’s weight in the Dow would rise significantly.

The editors aren’t bound by some rule that requires them to swap stocks within sectors. International Business Machines (IBM, $135.53) hasn’t impressed anyone for going on a decade now. Pulling Big Blue and replacing it with Google might not be a bad idea. Their respective share prices would be roughly in line with each other after Alphabet’s stock split.

Still, by strict definition, such a move would lift the communications sector’s weight in the average at the expense of the tech sector. It’s something the Dow editors would have to think about.

A Small Impact on the Market

Lastly, it’s important to know that getting tapped for the Dow is largely symbolic. 

When a stock is included in the S&P 500, its shares rise because a total of $13.5 trillion is indexed or benchmarked to the most widely used gauge of U.S. equity performance. Passive funds tracking the S&P 500 must own all of its components, weighted by market value. There’s no way around it.

The Dow Jones Industrial Average, by comparison, is a dud in this regard. True, the blue-chip barometer can’t be beat for brand familiarity. When regular folks talk about what the market’s been up to lately, they usually mean the Dow.

But where the S&P 500 leads tens of trillions of dollars by the nose, only $36.6 billion is indexed or benchmarked to the Dow. Mega-cap stock GOOGL, by itself, is worth roughly 53 times all the money tracking and chasing the industrial average.

Sure, it would be neat if Alphabet became a Dow stock, and perhaps fitting too. But that’s all speculative.

What we do know about the Alphabet stock split is that it should bring in legions of retail investors, possibly adding a tailwind – for a time – to the share price. Volume would increase … but then so too would volatility.

So be careful what you wish for.

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If January Predicts the Rest of the Year, Investors Could Be Hurting

The month of January 2022 is over, and it wasn’t a pretty one for investors. The Standard & Poor’s 500 closed at 4516, down 251 points, or 5.3%, for the month. Now, for some more potential bad news: If you believe a popular stock barometer, the market pain might just be getting started.

That’s because two patterns in January have historically predicted the direction of the stock market for the rest of the year with a high degree of accuracy, according to the Stock Trader’s Almanac.

The January Barometer

What is known as the January barometer indicates that as the S&P 500 goes in January, so goes the year.

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If the S&P 500 has positive returns in January, the overwhelming amount of time the market will end up with positive returns of 5% or more for the year. And if the S&P 500 has a negative return in January, the overwhelming amount of time the market will end up with negative returns of 5% or more for the year.

Going back to 1950 through the end of 2021 the January barometer has registered major errors in only 12 years out of the 72 years in this period. This gives it an 83.33% accuracy rate.

For those 12 years there were three where January was positive and the S&P 500 ended the year negative, and there were nine years where January was negative and the S&P 500 ended positive.

In 52 of the other 60 years if January was up the S&P 500 ended the year decisively positive, and if January was down the S&P ended the year decisively in negative territory.

In the remaining eight years the S&P 500 ended the year flat. Which means it was less than 5% above or below where it started the year. Put another way, the January barometer didn’t predict a meaningful loss or gain for those eight years.

If we eliminate these eight flat years, we would then have the January barometer correctly predicting the direction of the stock market in 52 out of the last 72 years which would be a 72.2% accuracy rate.

Negative Januaries Spell Trouble

Negative Januaries have been harbingers of trouble ahead. There have been 29 of them since 1950.

While nine resulted in decisively positive returns for the year (meaning returns of better than 5%), in 100% of the down Januaries they were followed by a new or continuing bear market, a 10% correction or a flat year.

Down Januaries were also followed by substantial declines sometime later in the same year averaging -13%. This is not good news for advocates of the January effect.

January’s First Five Days

The other pattern to watch is January’s first five days. In 47 out of the last 72 years, during the first five trading days of January the S&P 500 was up. This was then followed by full-year gains in 39 of the 47 years.

This means over this time period, 82.98% of the time when the market was up during the first five days of the year, it ended the year with a positive return.

Unfortunately, that wasn’t the case in January 2022. The S&P finished the first five trading days of the year down – although not dramatically – by almost 90 points, or 1.9%. 

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Judging by history, it’s tougher to tell what that might mean for the rest of the year, because in the other 25 years where the first five days in January were negative, the results were much less predictable. In 14 of these 25 years the S&P 500 ended with a gain, and in 11 of the 25 years it ended the year with a loss.

This means only 44% of the time was the market negative for the year (11 out of 25 years) when the first five days were negative, giving it only a 44% accuracy rate.

The average gain across all 25 years was roughly 1% a year as compared to the 13.7% average gain per year across the 47 periods where the first five days in January were up.

The Bottom Line

To summarize, since 1950 the direction of the S&P 500 in January, known as the January barometer, has accurately predicted the direction of the stock market for the year 72.2% of the time.

And when the return on the S&P 500 during the first five days of January has been positive, the stock market has had a positive return for the year roughly 83% of the time.

There are certainly pundits who consider these trends to simply be dumb luck, almost like voodoo economics. Others take these two trends very seriously.

While I wouldn’t bet my entire 401(k) plan on it, if you think these two January statistical trends are more than just dumb luck, you might consider using this information, along with other relevant data, in making modest tweaks to your level of stock exposure.

And if nothing else, keep your fingers crossed that the market in 2022 defies these two trends and ends the year higher.  

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Stock Market Today: Stocks Enjoy Stellar End to Woeful January

January 2022 will still go down as a turbulent and loss-ridden month for stocks, but at least it ended on a high note.

A relatively quiet news weekend followed by little in the way of fresh economic data gave investors little to go on Monday, but the session was peppered with a host of individual relief rallies.

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Most notable was the S&P 500’s seventh-largest holding, Tesla (TSLA), which popped 10.7% thanks to Credit Suisse analysts, who upgraded the stock to Outperform after it lost 20% in January.

“With the market disproportionately punishing growth stocks in the past month, we believe an attractive entry point has emerged for Tesla,” said CS analysts, adding that Tesla checks off a number of boxes: attractive growth story, disruption, decarbonization and more.

Netflix (NFLX, +11.1%), Moderna (MRNA, +6.2%), PayPal (PYPL, +5.2%) and Nvidia (NVDA, +7.2%) were among other recently beat-up stocks that closed the month with a rebound.

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The S&P 500 gained 1.9% Monday to 4,515, leaving it down 5.3% for the month. That marks the index’s worst January since 2009, and the worst month for stocks overall since March 2020. The Dow Jones Industrial Average (+1.2% to 35,131) finished January off 3.3%, and the Nasdaq Composite (+3.4% to 14,239) trimmed its full-month losses to 9.0%.

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 also roared back Monday, jumping 3.1% to 2,028.
  • U.S. crude oil futures surged 1.5% to settle at $88.15 per barrel.
  • Gold futures gained nearly 0.6% to end at $1,796.40 an ounce.
  • Bitcoin recovered some ground over the weekend and into Monday, improving by 1.9% to $38,484.05. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.) 
  • Spotify (SPOT) jumped 13.5% after the audio streaming service over the weekend said it would start adding content advisories to podcasts that contain information about COVID-19. This comes after several musicians, including Neil Young, pulled their music from Spotify to protest podcaster Joe Rogan from spreading misinformation about COVID-19 on his show “The Joe Rogan Experience.” SPOT was also upgraded to Buy from Neutral by Citigroup analysts.
  • Barclays analyst Benjamin Theurer issued a double uptrade on Beyond Meat (BYND, +15.2%) stock today, raising his outlook on the plant-based protein maker to Overweight from Underweight (the equivalents of Buy and Sell, respectively), saying there are “more positives than negatives” in the U.S. alternative meat product market. BYND already has several high-profile partnerships, including with drinkmaker PepsiCo (PEP) and Taco Bell parent Yum! Brands (YUM). And earlier this month, McDonald’s (MCD) said in February it will boost its test market for BYND’s plant-based burger by another 600 locations.

A Weak Environment for IPOs, But …

Market pundits generally predict more volatility ahead, but that doesn’t mean investors should write off 2022.

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“Market corrections are a normal part of investing and may present opportunities for value-conscious investors,” say Jason Pride and Michael Reynolds, CIO of private wealth and vice president of investment strategy, respectively, at investment firm Glenmede. “Growth should continue in 2022, albeit at a slower yet still acceptable pace consistent with an ongoing expansion.”

One area of the market desperately looking for signs of normalization and stability is initial public offerings (IPOs). Last year marked a banner year for IPOs, with more than a thousand companies raising roughly $316 billion, according to financial markets platform Dealogic. However, increased volatility slowed IPOs to a crawl in the latter part of 2021, and the slowdown extended into January.

Nevertheless, once the IPO gears start moving again, investors should be able to gain access to several exciting, well-known names. Here, we outline 11 companies widely expected to launch IPOs in the year ahead.

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