Weak markets, a low share price, a large number of shares outstanding, little or no cash and you have a company which is an idea candidate for a REVERSE STOCK SPILT.
The basic concept of a REVERSE STOCK SPILT or consolidation in a company's shares is rather simple.
Companies will a large number of shares outstanding (normally over 150 million) are striving for a higher share price which may make it easier to sell more stock.
How it Works
Say XYZ Gold has a share price of C$0.10 and outstanding shares of 200 million. Total capitalization is C$20 million. The company is seeking to raise more monies but in a very slow market environment and a low share price finds this may be difficult.
The company then announces a REVERSE STOCK SPILT of 1 for 4. So, what happens? After shareholder approval and the REVERSE STOCK SPILT becomes effective, the share price would start trading at C$0.40 and now the outstanding shares of the company are 50 million. Total capitalization is still $20 million.
Effect on current shareholders
Technically current shareholders own ¼ of the number of shares but the price is now 4 times higher so zero net affect. So what's the big deal?
Reality of a REVERSE STOCK SPILT
In virtually all cases of a REVERSE STOCK SPILT of shares the share price will tend to drift back down to a lower level. If the overall market environment for resource shares stays weak, then there is a high probability that the shares will still drift lower. Those shares above at C$0.40 may drift back down to C$0.30 or much lower. The question always is, 'how low can they go'?
Some of the juniors and exploration companies seem to do nothing through the years except to sell stock. Those monies are used for exploration and paying salaries of management but then it is time to do it again, and again, and again. Investors must filter out those companies which have a pattern of constant diluting the holdings of current investors while management continues to earn, sometimes, large salaries. Unfortunately, most of the time, additional shares are sold in a weak market with a low share price. Many don't seem to have any sense to sell stock in a rising market which is probably a good indicator of a management team you do not want to follow.
Our Opinion on REVERSE STOCK SPILTs
Normally, if we own shares in a company and a REVERSE STOCK SPILT is announced we will choose to immediately sell our position knowing that the share price will drift back down at which point we may decide to repurchase the shares or just ignore them all together. Remember, the reason for the REVERSE STOCK SPILT is normally to raise the price to make it easier to sell more shares.
We are witnessing a few cases of REVERSE STOCK SPILTs not with the purpose of raising more money but rather to facilitate the listing of the company's shares on the NYSE Amex.
Due to the requirements of listing on some exchanges it is necessary to have a higher share price. The benefits of this listing could be enormous in attracting more investors, individuals as well as large investment groups and mutual funds in the U.S. The company believes the increased visibility of this new listing will result in a higher share price in the future and we agree.
Some of the companies which we follow have or in the process of listing on the NYSE Amex and have rolled back their shares in anticipation of this new listing. In these cases, we understand the reasons for the REVERSE STOCK SPILT as all investors are looking for the possibility of higher share prices as more investors become aware of these companies.
If you like the specific company striving for a NYSE Amex listing, great, Hold your positions but do not buy more shares in anticipation of the REVERSE STOCK SPILT, rather, wait for the completion of the REVERSE STOCK SPILT and watch the market closely. These shares may also drift lower providing investors an even better buying opportunity.
Investors in this case should continue to be optimistic:
Conclusion on REVERSE STOCK SPILTs
Immediately on the announcement of a REVERSE STOCK SPILT decide the reasons therefore and whether you want to remain a shareholder of this company.
As always, "It's your money, so perform your own research and due diligence".
Dudley Pierce Baker
Dudley Pierce Baker is the founder and editor of Precious Metals Warrants. PreciousMetalsWarrants provides an online subscription database for all warrants trading on junior mining and natural resource companies in the United States and Canada and a free weekly newsletter. Jeff Baker has recently joined us and will be providing editorial comment and marketing assistance to our services.
Dudley also represents TheGreedyGuru.com (Top Picks of the Pros). Only the 'best of the best' companies are followed and recommended.
Neither PreciousMetalsWarrants.com nor TheGreedyGuru.com are investment advisors and any reference to specific securities does not constitute a recommendation thereof. The opinions expressed herein are the express personal opinions of Dudley Baker. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.