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Why Apple's Lower Price Tag Spells Bigger Gains in 2014

BALTIMORE (Stockpickr) -- Following the 7-to-1 stock split that went into effect on Monday, $94 Apple (AAPL - Get Report) is leaps and bounds better than $658 Apple.

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I realize how stupid that sounds to anyone who knows the first thing about how stocks work. But bear with me.

Sure, Apple's split effectively boils down to an accounting maneuver. If you owned $1,000 worth of Apple stock on Friday, you still own the same $1,000 or so of shares (give or take a couple of days' market fluctuations) -- but your stake is now cut up into smaller individual pieces. Any first-year finance undergrad could tell you that a stock split doesn't make a real impact on where Apple's headed from here.

But they'd be dead wrong.

Instead, post-split Apple is far better-positioned to drive home meaningful gains than its triple-digit predecessor. And today, I'm going to show you why.

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Before we get into it, I should give you my standard disclaimer: I own the stock. I'm not an "unbiased" journalist. I'm an investment professional, and I'm talking my book, just like I have before. But that doesn't make anything I'm about to say any less true.

I remember back in college, on the first day of Economics 101, my professor wrote a set of basic economic assumptions on the board. The first was that "market participants are rational." Ugh.

Investors aren't rational. We're often far from it, in fact. Market inefficiencies are everywhere. That's why shares of a bankrupt home theater company called TWTR Inc. gained 1500% the day Twitter's (TWTR) ticker symbol got filed. Oops. It's also why the value of the S&P 500 made a nearly 62% round-trip run between cratering in 2008 and bouncing back in 2009.

These aren't rare occurrences. As Warren Buffett once said,"If markets were rational, I'd be waiting tables for a living."

Anyone who thinks that stock splits don't matter has never had a client throw a fit because a stock price was "too expensive." Yes, it happens. And that's precisely what makes Apple's split so genius.

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According to Apple itself, the reason for the split was to make AAPL "more accessible to a larger number of investors." Hogwash. The real reason was to knock down a psychological stumbling block for a share price that's been having difficulty sustaining momentum in spite of a valuation that's dirt cheap compared with others today.

In doing so, the firm basically indexed its new share price to the $700 high-water mark that shares hit back in September 2012. As I write, a mere $5.75 is all that stands in the way between Apple's current price and all-time split-adjusted highs.

It doesn't sound like much, does it?

That may all be anecdotal, but the data back it up too. According to a study by David Ikenberry at the University of Colorado (referenced by Mark Hulbert in a recent column), a stock outperforms the market by an average of 7.9% in the year following the announcement of its split and by an average of 12.2% in the three years following the announcement.

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AAPL $94.19 -1.04%
FB $118.06 0.54%
GOOG $695.70 0.48%
TSLA $222.56 -4.20%
YHOO $36.00 -0.03%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

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