One of the worst-performing high-profile IPOs of the past decade made fresh lows on Friday after the company approved a 15-to-1 reverse stock split to maintain its NYSE listing. Blue Apron Holdings Inc (NYSE: APRN) shares dropped 15.6 percent to 55 cents per share on Friday.
Here’s everything investors need to know about the reverse split, why it is happening and what it means for the company.
Why The Sell-Off?
In theory, neither stock splits nor reverse stock splits directly impact the market valuation of a company. Traders can think of the old pizza cliche. A large pizza can be cut into 16 slices or four slices, but the size of the pizza doesn’t change.
However, announcements of stock splits are often positively received by the market, whereas announcements of reverse splits are negatively received, as in the case of Blue Apron. The biggest reason why reverse splits are perceived negatively is because reverse splits tend to be the culmination of prolonged underperformance by a stock and a signal that the company is not anticipating an organic rebound in share price in the near future.
Reasons For Reverse Splits
There are several reasons why a company may choose to undergo a reverse stock split.
First, major U.S. exchanges like the NYSE and Nasdaq only allow share prices below $1 for a limited amount of time before they will delist the stock. Blue Apron, which trades on the NYSE, has been trading below $1 per share since early May.
In addition to maintaining a listing, companies like Blue Apron don’t want their stock trading for pocket change. Potential investors see a 55-cent stock and they immediately make assumptions about the quality of the underlying company.
Finally, companies choose to undergo reverse stock splits to make their shares accessible to more investors. Standard stock splits often happen when a share price gets so high that retail investors may have trouble affording it. At the same time, reverse stock splits can ensure that mutual funds and other institutional investors that are restricted from buying penny stocks are not excluded.
In the case of Blue Apron, management said the reverse split is intended “to ensure the Company regains full compliance with the NYSE share price listing rule and maintains its listing on the NYSE and to improve the marketability and liquidity of the Company’s Class A common stock.”
Poor Track Record
Unfortunately, reverse splits are often nothing more than a temporary band-aid on a company that is bleeding to death. Beyond maintaining their listings, stocks with share prices below $1 are seen by many traders as junk investments and dead-end companies.
Long-term investors especially should be careful about taking a stake in any stock following a reverse split. A recent study by Ibbotson & Associates found that reverse split stocks from 1926 to 2017 have underperformed the overall market by an average of 4.3 percent annually over the first five years following the reverse split.
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Photo courtesy of Blue Apron.
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