In theory, a stock split should not have any impact on stock market performance, let alone generate any alpha. It turns out that in practice, it does. At least, it did over the past ten years according to Mark Hulbert and WSJ.
A company with 30 million shares outstanding earning $2 per share, will have 60 million shares earning $1 per share after a 2 for 1 split. The total earnings remain the same after the split. There should be no positive reaction by the stock market. The truth is that in short-term perspective, mood and psychology could trump math. And short-term could sometimes mean years.
The reality is that stock splits are often a side effect of momentum. Companies often decide to split their shares after they had a spectacular run. The ensuing outperformance is not a consequence of the split but a mere continuation of an ongoing earnings, sales and price momentum.
One more argument that Relative Strength is among the most consistent and reliable equity selection criteria. Relative strength is not flawless. Historically, it has worked best when measured on a 3 to 18-month basis. Beyond 3 years, it often leads to mean-reversion. With other words. The best performing stocks of the past six months, are very likely to continue to outperform in the next 6 months. But, the best performers of the past 3-5 years, are very likely to underperform in the next 3-5 years.
