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A few years back, stock splits were like our bread and butter plays.
In 98 and 99, someone like JDSU could announce a split, run up 30
bucks, do the split, run up 100 dollars, split again, run up 100
dollars etc. It was like something out of a fantasy. Well seeing the
techs loose 65% across the board and seeing those same high flyers
fall some 95% sure took the wind out of that sail. But that
said, splits are still quite important and we think we are going to
start seeing more of them in healthcare and oil.
One could argue as to just what is "normal" for a market, but if you
thought about the market in terms of normal, the most effective way
of getting rich long term was to buy a great company, hold onto it
and let it split. Then you have twice the shares ( on a 2 for 1
ratio split) and you'd hold it for another couple years, it would
run up and split again. People who did that from the early
90's in stocks like MSFT, CSCO, JDSU, SUNW, DELL and a dozen others
created serious wealth.
We are not a big proponent of buy and hold any more, but we do think
that there is still a future for buying stocks that have a good
track record, and that are in spit territory. In general terms big
companies that get to 100 often do a split of either 2 for 1 or 3
for 2 ratio's. Naturally they don't all do that, but a large
percentage of them do. Not only does it make the stock more
"affordable" to more people, the investors that do have the stock,
get twice as many shares. So for the most part it's a win/win
situation.
One thing a lot of people don't' realize is that when a stock
splits, the options on that stock split too. So, if you are holding
say 10 contracts of XYZ 100 dollar calls, and the underlying stock
does a 2 for 1, you will now have 20 contracts of the 50 dollar
call. This can be really really rewarding if you have the "time" for
the stock to do it's split, and then recover from any post split
funk and move higher. One of the longer term "holds" that we are not
against is buying LEAPS
on high dollar stocks that could be splitters.
Look at UNH. They did a 2 for one in 01, and another in 03. Guess
what? They are back to 98 dollars again. Could they announce another
split, do a 2 for 1, and then move back up in a year? You bet.
So, holding some at the money, or just slightly out of the money
LEAPS on something like that "could" be very rewarding. We have a
hunch that we'll start seeing something like that in names like VLO,
XOM, AHC,and COP. (especially COP)
Consider this strategy, but if it's too speculative for you then
simply wait on a good company to actually execute it's split and
then buy longer term calls during the post split funk. More times
than not, a year later you'll have been rewarded.
For more nightly trading tips, copy and paste in the following:
http://clix.to/wallmann
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