2023 Surge in Reverse Splits: A Deep Dive into Wall Street’s Growing Discomfort

Markets are fickle creatures, much like the weather – at times calm, at others stormy. But there’s a truth in investing: bear markets are more of a marathon than a sprint. This year, the financial world commemorates the first anniversary of the S&P 500’s drop to 3491, a time of significant tumult sparked by Federal Reserve Chair Jay Powell’s pointed remarks at the 2022 Jackson Hole Economic Symposium. The aftermath? A vertiginous descent in equities, from which a foundation for recovery only emerged in mid-October.

Market Recovery: A Tale of Two Cities

For many investors, the journey post-September 2022 has been riddled with occasional hiccups but otherwise positive. Robust returns have been seen across diverse sectors, irrespective of market cap or investing style. However, beneath this surface of recovery lies a sea of unease for many corporations.

Earlier this summer, the Late Earnings Report Index (LERI) signalled potential distress, indicating a likelihood of adverse corporate news as Q2 reports loomed. And, while Q2 earnings were generally acceptable, the reaction of stocks was muted. The giants of the stock exchange world – the S&P 500, Nasdaq, and Russell 2000 – all bore the brunt of this disappointment with notable losses in August.

The Rise of the Reverse Split

For those not watching the minute details, a quiet but alarming trend is unfolding. Wall Street Horizon’s astute team has identified a surge in reverse stock splits. To understand this, it’s imperative to recall 2021’s backdrop: an era of unprecedentedly low-interest rates and a surprisingly quiet stock and bond market. This unique environment witnessed only 68 reverse stock splits.

However, by 2022, this figure had almost tripled to 159. Fast forward to 2023, and we’re on track to exceed 200. To put this into context: since 2016, for every traditional stock split, there’ve been approximately 2.22 reverse splits. However, this ratio, which stooped to 0.78 in 2021, has skyrocketed in 2023 to an astounding 5.76.

Annual Split Count & Ratio Line: Euphoria in 2021, Desperation in 2023

Reverse Split Hall of (In)Fame

So, who are the key players resorting to this oft-perceived desperate move? Among them are erstwhile pandemic success stories, including SPACs. The story of WeWork is a telling example. Once valued at a colossal $47 billion post its IPO in October 2021, its worth has since plummeted to a paltry $300 million. Its recent move? A 1-for-40 reverse stock split.

WeWork 3-Year History: Work from Anywhere Is Not Working Out

Express Inc (EXPR) offers another cautionary tale. A ‘meme stock’ of early 2021, it once surged from a mere $0.58 to almost $10. But, in a telling twist, is now aiming for a 1-for-20 reverse split, hinting at underlying corporate distress.

Express 5-Year History: Meme Stock Hype Short-Lived

A Silver Lining: Copart’s Triumph

In these uncertain times, Copart Inc (CPRT) offers a glimmer of hope. The Dallas-based giant, valued at $41 billion, initiated a 2-for-1 traditional stock split this August. As the undisputed leader in online auctions for vehicles, it stands as a testament to resilience and growth, even amidst global challenges.

Copart 5-Year History: An Industrials-Sector Standout

In Conclusion

Despite the market’s upward trajectory, the rising frequency of reverse stock splits compared to traditional ones reflects underlying corporate unease. It’s a silent indicator that all may not be as well as it appears.

As we navigate these intricate financial landscapes, it’s crucial to remain vigilant. Key players like Nvidia (NVDA) and Eli Lilly (LLY) might hold the keys to reigniting the allure of traditional splits. But for now, the surge in reverse splits remains a stark reminder of Wall Street’s underlying disquiet.