Cramer on Why He Likes Stock Splits

Here's an article that will have the Harvard Business School calling for my head: Splits are great. They create wealth. Instant wealth. Oh, I hear the groans on the Charles. Instead of one share at 100 you are getting two shares at $50. What's the big deal? That's just marketing, I am sure they would be saying if they had the Net up there.

And they would be exactly right. I remember when the Trading Goddess first had a fight with me about splits when I left Goldman Sachs and she had been trading for seven years already. I was giving her the party line about how splits are a joke, they mean nothing. And she told me that if that was my attitude I should hang 'em up because I knew little about what moves a stock higher. Splits, she would say, are the greatest marketing devices ever invented. They create good feeling among shareholders at no cost whatsoever to management. They are nothing but Net.

That's why this morning I insisted on pointing out on Good Morning America that I pursue aggressively stocks that split. Take last week. I was listening to some guy drone on about splits on CNBC, pointing out that stocks that trade at $100 are always candidates to split. On my monitor, at the top right, stood Gillette, at $104. I said to myself that Gillette was a natural candidate to be split soon. Seconds later it came over the tape that G was going to split two for one. In the time it takes for one Harvard B School professor to brainwash a class about the worthlessness of splits, I took 25,000 G at 104.75.

Ten minutes later Gillette was at 106 and climbing. I offered my stock and got taken at 106 and a half, a gain of more than $35,000. A gain that came because of the split.

Now, maybe you could argue that the stock should not have gone up when the split was announced. But I am from the "who cares" school of profits, meaning who cares how money is made, as long as it is legal. Right now anticipating splits and the concomitant positive reaction is a money-making game, so I am playing it. Split anticipation always works in a bull market. (In a bear market, of course, you could split your stock five ways till Sunday and nobody would care.)

What is the true worth of splits? I see only one real benefit. By reducing the amount per share that an individual has to pay to get in the stock, management is encouraging a broader-based retail ownership. Retail does not flip or sell on downgrades as much as institutional. Retail is not fickle and doesn't budge when Kurlak downgrades or Edelstone upgrades. Retail is buy and hold. It doesn't need a weatherman to know which way the wind blows. (Gratuitous Dylan reference.)

So splits help the shareholder base stabilize by putting stock in the hands of those who go to their graves with shares. And that's reason enough for me to buy.

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