On the surface, reverse stock splits may seem like reasonable moves for struggling companies to make. Once a stock dips near or below $1 per share, there are a lot of potential dangers. First, many institutional investors are forbidden by rule from investing in stocks priced under $5. Without access to institutional capital, stocks trading under $5 are fighting an uphill battle.
Second, stocks priced under $1 per share are at risk of being delisted from the Nasdaq or NYSE. The exchanges are typically fairly lenient with stocks that dip below $1 for a short period of time. The NYSE, for example, allows 30 consecutive days of trading below $1 before it delists a stock. However, after 30 days, the company is at risk of being booted to the OTC market, which is something most legitimate companies want to avoid at all costs.
Finally, the lower a stock’s share price goes, the worse of an impression it makes on potential investors. From a psychological standpoint, a $20 stock seems like a better stock than a $2 stock.
Unfortunately, reverse stock splits rarely seem to work. A Florida State study found that only 24% of reverse stock split stocks recover at least 20% of their market cap within 250 days of the reverse split. Since most of these reverse split stocks have endured heavy losses heading into the split, this low percentage of meaningful recovery paints a bleak picture for investors.
Typically, one or more reverse stock splits is the death knell for a stock. Here are three reverse split stocks that long-term investors should avoid like the plague.
Reverse Stock Splits to Sell: DryShips (DRYS)
To the credit of DryShips Inc. (NASDAQ:DRYS), the company is doing everything it can not to go down with what seems to be a sinking ship. If a reverse stock split is a red flag for an investor, DRYS shareholders should be fairly concerned at this point, to say the least.
DRYS stock underwent a 25-to-1 reverse split last March, a 4-to-1 reverse split last August, a 15-to-1 reverse split in November and an 8-to-1 reverse split last week.
DryShips management is trying desperately to maintain its $1 share price requirement to maintain a listing on the Nasdaq. The market is having none of it. DRYS stock is down a whopping 99.8% in the past year. Incredibly, the stock was down 78% in only six trading days after it announced its most recent reverse stock split.
The company is drowning in debt, and the market knows it. Unless you are a short-term trader looking for another massive, short-term short squeeze or a dead-cat bounce, stay away from DRYS stock.
Reverse Stock Splits to Sell: Support.com (SPRT)
If you’ve never heard of Support.com, Inc. (NASDAQ:SPRT), it’s…
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