Each month, Neil Macneale reviews the stocks that have announced upcoming splits, and selects companies to add to the model portfolio for the 2-for-1 Stock Split Newsletter.
There have been two eligible split announcements since last month and both stocks, for different reasons, are worthy of inclusion in the Index.
The small cap Merchants Bancorp (MBIN) of Carmel, Indiana announced a 3 for 2 split last month. 2 for 1 has had generally good, to very good, returns from its positions in small banks over the years and I'm counting on MBIN to add to that string of winners.
Merchants Bancorp appears to be significantly undervalued. Earnings have averaged over 40% growth annually for the last five years while the PE ratio comes in at just over six.
MBIN currently has an ROE (return on equity) of 25.60%, three time higher than the industry average of 8.46%. Insiders own almost 7% of the shares of MBIN, always a good sign in my opinion. This certainly looks to me like a stock "flying under the radar".
NAPCO Security Technologies, Inc. (NSSC) is also a small cap with heavy insider ownership but NSSC appeals for different reasons. The company offers access control systems, door-locking products, intrusion and fire alarm systems, and video surveillance systems for commercial, residential, institutional, industrial, and governmental applications.
NSSC announced a 2 for 1 split earlier this month and the stock market paid little attention. This exemplifies one of the findings of the original study that inspired the 2 for 1 Index.
In his 1996 study, David Ikenberry described how the market usually under-reacts to the positive signal sent by a split announcement. I call this the Stock Split Advantage.
In addition to having this advantage, NSSC is profitable and is growing fast with zero debt on the books. These good numbers are offset by the lack of a dividend and somewhat elevated valuation numbers.
Combining all the numbers, NAPCO's score is only slightly positive on the 2 for 1 proprietary ranking scale, but I'm going with it anyway. It's a sad truth that the equipment and services offered by NSSC are in high demand now in a world beset by uncertainty and declining civility.
