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Stock Splits Are Trash for Apple & Tesla Stock Valuations

W. E. Messamore
Last Updated September 23, 2020 2:27 PM
  • Apple and Tesla stock surge on stock split mania.
  • One legendary hedge fund manager scoffs.
  • The bulls need to revisit Warren Buffett’s 1999 remarks about stock bubbles and how to value equities.

Fed Chair Jerome Powell is putting the pedal to the metal on the digital U.S. dollar printer. You’ve got two cents on every dollar to use or lose in 12 months. If you are billionaire investor and hedge fund manager Leon Cooperman, with $3.3 billion in assets under management at Omega Advisors, that’s $66 million.

Where do you park your capital?

Markets are piling it into Tesla (NASDAQ:TLSA) and Apple (NASDAQ:AAPL) this week after the companies split their shares.

Apple is dividing its shares into four, and Tesla is splitting five ways.

Amazon (NASDAQ:AMZN) is undoubtedly watching  investor enthusiasm with interest. It has the highest share price in the NASDAQ 100.

tesla stock apple stock split chart versus s&p 500 and nasdaq composite aug 2020 source tradingview
Tesla is surging in stock-split mania on top of a forceful rally since March. Apple got a bump out of splitting its stock too. | Chart: TradingView 

On Monday, Tesla stock moved more like one of Elon Musk’s rockets than his electric cars. That lifted the engineer and CEO past Facebook’s (NASDAQ:FB) Mark Zuckerberg for personal net worth.

Musk is now the third richest person in the world .

Hedge Fund Billionaire Scoffs At Stock Split Rally

Watch CNBC’s Phil LeBeau report on the split and upcoming events relevant to Tesla stock:

It’s the big money moving on Tesla, not the retail crowd. But investing legend Lee Cooperman is having none of it. He’s got better trades to make with Omega’s $3.3 billion than going off stock-split headlines.

In an interview Monday on CNBC’s “Squawk Box,” Cooperman said explained it like we’re five years old :

Look at Tesla and Apple. Everybody understands that splits don’t create value. My dad once told me if you gave me five singles for a five dollar bill, I’m no better off. Okay?

The same goes for shares of car and computer makers:

So we see Tesla up 54% since the day they announced the split. The S&P is up less than 4%. Apple’s up 30% with the [NASDAQ] up 6%. And everybody’s talking about the split. You know the splits don’t create any value.

Neither company’s stock split cuts costs, acquires customers, improves products, pivots marketing, or drives sales. As another investing legend Warren Buffett once said in rare 1999 remarks on the overall equities market:

The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.

Tesla could be in for a long bull run. But the company’s explosive valuation will eventually have to reckon with annual sales less than 3% of Toyota’s .

Buffett Warning for Apple and Tesla Bulls

Watch Yahoo Finance’s Jared Blikre’s report as Tesla surpassed Toyota in total market capitalization in July:

As Buffett said:

Bear in mind–this is a critical fact often ignored–that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices.

Investors are treating Tesla like a tech company in terms of growth expectations, justifiably so for many reasons. But unlike other tech giants, the carmaker’s business model will always have a capital intensive structure for both fixed and marginal costs of production. The Oracle of Omaha’s axiom bears reiterating:

The absolute most that the owners of a business, in aggregate, can get out of it in the end–between now and Judgment Day–is what that business earns over time.

It’s not like the stock split even frees up more capital to flow in by lowering the barrier to entry for smaller investors. It might make sense to price that in years ago, but zero-commission, fractional share brokerage is now widely available.

The stock split rally is a symptom of corrupt incentives and perverse investing psychology.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.