PE and price-to-book ratios are the first numbers I look at when evaluating a new split announcement. It doesn’t matter how great a company is—you shouldn’t buy it if the price is too high—explains Neil Macneale, editor of 2-for-1 Stock Split Newsletter.
This principle often conflicts with the fact that companies are usually announcing a split when their stock price is at or near an all-time high. So when is an all-time high too high?
The judgment has to be made on a case-by-case basis but if a board of directors is confident enough in their business to declare a 2-for-1 split while, at the same time, their PE is below average for the market and their industry, then the odds are you’re looking at a good value regardless of the stock price.
As market volatility drives us crazy, please take comfort in the intrinsic value of the companies in your portfolio. You will eventually be glad you own them.
Because September provided only two new 2-for-1 split announcements to analyze, I went back several months to take another look at the announcements from the recent past.
Cytec Industries (CYT) has come down in price since its split announcement in July and, as a result, scored far better in the rankings this time around.
Cytec was spun-off from American Cyanamid in 1993 and, through divestitures, acquisitions, and investments in new technology, has become one of the premier specialty chemical and material manufacturers in the world.
The stock's PE ratio of around 15 is well below the market average and also below its peers, as is its price-to-book ratio. The stock pays a 1.1% dividend, recently increased, and net profit and returns are strong.
I don’t like the higher-than-average volatility of this stock but this one negative metric is not enough to dissuade me from buying it as the newest addition to our model portfolio.
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