*Extra* Counterpoint: Why Splits Don't Matter

Herb reminds investors that it's not the splits, stupid.
Author:
Publish date:

There goes

Cramer

again, in a column

earlier today, talking about the virtues of investing in companies that he thinks may split their stocks. And there he goes calling my view, that splits really don't matter, "hopelessly outdated, a relic."

Sorry, Jim, but the very fact that anybody can talk about how you can play a stock for its potential of a split is yet another sign of these irrationally bullish times. All you have to do is go look at what happened to

Siliconix

(SILI)

after it announced a 3-for-1 split today. It rose 44% -- that's

44%

-- and why? Because of nothing more than a split?

Honestly, if that's not a sign of excess, what is? Look, there's nothing wrong with companies splitting their stocks. But as I said back on the pilot for our show on the

Fox News Channel

, it's the oldest smoke-and-mirrors trick in the book because it does little more than make a stock look cheaper than it really is. Everything else in the company, right down to earnings per share, is adjusted to reflect the split. Nothing -- and I mean

nothing

-- changes but the perception of value.

Herb's Latest: Join the discussion on

TSC message boards.

Originally splits were done so individuals could buy a round lot, or 100 shares, which in the very old days of a decade or so ago would have gotten them a cheaper commission on the trade. With discount brokerages, however, the cheaper commission per 100 shares is no longer an issue.

But companies remain keenly aware of investor psychology: that investors like to think they're getting something for their money, and that 100 shares at half the price feels better than 50 shares at full price. What's more, study after study has shown (back then, in the old days) that, for the most part, the stocks of companies that split their shares went higher. However, the stocks didn't go higher

because

of the split: They went higher because, in the old days, the only companies that split stocks were companies that made money. And the splits reflected a stock that had soared because of fast-growing earnings.

But, hey, this is the new era, and JJC is writing today about how he "took down" some

Phone.com

(PHCM)

, another typical dot-com, for the simple reason that there's speculation it might split its stock. Of course, a year ago JJC was

praising

Amazon.com

(AMZN) - Get Report

chief Jeff Bezos for the way Bezos pulled a split out of his hip pocket just as Amazon's stock had tumbled -- a reminder of how manipulative, if not downright promotional, stocks have become. Go back and read my

column from earlier this week on

Track Data

(TRAC)

, which is splitting its low-priced stock for the second time in six weeks. (The CEO conceded to me, after the story ran, that the split news helps shine much-needed attention on his company.)

Sure, the prices of many of today's companies that split their stocks will go higher, as will their earnings -- if they have them. And traders like JJC are likely, in the short term, to make a bundle by trading them. But anybody playing that game should never lose sight of my old favorite

Iomega

(IOM)

, which tried to play the split game two years ago when its stock was around 15; the stock has never been that high since.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.