Nortel's Split Lip

An analyst sees a selloff after Friday's planned reverse stock split.
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Nortel (NT) shareholders should prepare for a rough day.

The Toronto telecom equipment giant is set to split its stock 1-for-10 Friday in a so-called reverse split. And as some observers point out, that usually spells an immediate stock slump.

As a heads-up to shareholders, RBC analyst Mark Sue pointed out in a research note Thursday that reverse splits tend to put stocks in a familiar and unpleasant post-move pattern.

"Nortel's shares may be increasingly volatile over the next few trading sessions as the company's reverse stock split takes effect tomorrow," Sue writes.

Fundamentally, splits and reverse splits should have no bearing on a stock's performance, but history shows the initial effects aren't always good.

"While nothing changes from a structural point-of-view, our analysis of companies who have recently completed a reverse stock split suggests that the average share-price may decline up to 8% during the first week," Sue writes.

Gearmaking peer

Ciena

(CIEN) - Get Report

, for example, made its 1-for-7 reverse move on Sept. 25 and the stock fell 12% in the following three days. After the initial slide, the shares staged a bit of a comeback, but then resumed the downturn. Adjusting for the new price, Ciena is now 17% below its pre-reverse split levels.

A week after

JDSU

(JDSU)

did a 1-for-8 reverse split on Oct. 17, the stock fell 14%. But trading has been good for JDSU in recent weeks; the stock is now up 10% above its pre-reverse levels.

With the reverse, Nortel's 4.34 billion shares will turn in to 434 million. But Nortel has a shareholder lawsuit settlement that needs to be factored in, says Sue.

"With the reverse split and the extra shares related to the legal settlement, the fully-diluted share count may be closer to 505 million," he writes. That dilution can't help the stock he adds.

Nortel shares were down a penny, to $2.17 in midday trading Thursday.