It’s not Nvidia, Broadcom or Chipotle Mexican Grill)

One of the few constants on Wall Street is that there is always a cutting-edge innovation and/or group of game-changing companies that investors can flock to. For example, the rise of artificial intelligence (AI) is causing investors to snap up AI stocks like they’re going out of style.

But even before AI became the hottest thing since sandwich bread on Wall Street, investors were flocking to companies doing stock splits.

A stock split is an event that allows publicly traded companies to make superficial changes to their stock price and number of shares outstanding. I call these changes “superficial” because changing a company’s stock price and number of shares by the same magnitude has no impact on market capitalization or operating performance.

Stock splits come in two forms: forward and backward. With a forward stock split, a company seeks to make its stock price more affordable to retail investors. In contrast, a reverse stock split aims to increase the price of a company’s stock, often with the aim of ensuring that it meets minimum standards for listing on a major exchange.

Investors typically focus their attention on high-flying companies that conduct forward stock splits. Since the start of this year, eight of the nine highest-profile stock split announcements have been forward splits.

Over the past couple of months, I’ve aggressively increased one of these nine high-profile split stocks — even though it’s probably not the one you’re thinking of.

Wall Street’s hottest split stocks are on my watch list, but not in my portfolio.

For years, forward stock splits have served as a beacon to show investors which companies have outperformed and innovated their competitors. In 2024, three of these perennial outperformers have announced and/or completed stock splits.

• Colossus of artificial intelligence Nvidia (NASDAQ: NVDA) announced its intention to pursue a 10-for-1 forward split, which became effective after the June 7 close.

• The board of directors of a fast-casual restaurant chain Chipotle Mexican Grill (NYSE:CMG) approved a 50-for-1 forward stock split on March 19, which became effective earlier this week (after the closing bell on June 25).

• Specialist in semiconductor networking solutions Broadcom (NASDAQ:AVGO) Broadcom unveiled its proposed 10-to-1 split on June 12, with an effective date of July 15. This is the first split in Broadcom’s history since its acquisition by Avago Technologies in 2016.

This trio of stock splits is getting a lot of attention on Wall Street – and for good reason. All three companies crushed it operationally.

The story continues

• Nvidia’s H100 graphics processing units (GPUs) have become the standard in AI-accelerated data centers. Demand for Nvidia’s AI GPUs has overwhelmed supply, leading to phenomenal pricing power. Additionally, most of the “Magnificent Seven” are Nvidia’s largest customers in terms of net sales.

• Chipotle’s management team has kept its promise to use locally sourced vegetables (when possible) and responsibly raised meats in its restaurants to court consumers looking for higher quality foods . Additionally, keeping your menu limited allows you to speed up meal preparation and reduce customer wait times.

• Broadcom is seeing a surge in demand for its AI networking solutions, including its Jericho 3 AI fabric, which can connect up to 32,000 GPUs and maximize their computing capacity. Beyond AI, Broadcom is a key supplier of wireless chips and accessories used in next-generation smartphones.

While these three high-flying stocks (for better or worse) have a place on my watch list, they won’t be in my 42-stock investment portfolio. On the contrary, the split stock in which I have more than quadrupled my stake in the past two months is the only high-profile company to notify its shareholders of an upcoming reverse split.

Say Hello to the Stock Shares I Can’t Stop Buying

Stock consolidations often have negative connotations. Indeed, the companies that run them have generally seen their share prices fall. But that’s not always the case, as evidenced by the $11 billion market cap company I invested in: Sirius XM Holdings (NASDAQ:SIRI).

In December 2023, Liberty Media announced that its follow-up stock Sirius Liberty Sirius XM Group (NASDAQ: LSXMA)(NASDAQ:LSXMB)(NASDAQ:LSXMK) Sirius XM Holdings would merge with Sirius XM Holdings to create a new public company (“New Sirius XM”) with a single class of shares outstanding. The fact that Liberty tracker Sirius XM Group is the primary owner of Sirius XM’s outstanding shares has admittedly been a source of confusion for years. The merger of the two, which is expected to take place during the third quarter, will end the confusion and any unexplained arbitrage between the securities.

But as it stands, Sirius XM Holdings has about 3.85 billion shares outstanding. Some mutual funds and institutional investors simply won’t buy stocks priced below $5 because they’re considered too risky.

A June 17 8-K filing from Sirius XM indicates changes have been made to that merger agreement that will result in a 1-for-10 reverse split at closing. This should increase the new company’s stock price to near $30 (based on the June 21 close) and will likely entice new institutional investors and mutual funds to take the plunge.

But let’s be clear: I didn’t more than quadruple my stake in Sirius XM due to a stock split. I did so because of the company’s clear competitive advantages and historically cheap valuation.

Sirius XM is the only licensed satellite radio operator, which has some unique advantages. Although it still competes with terrestrial and online radio operators for listeners, being the only satellite radio operator gives it reasonably high subscription pricing power.

I will also add that certain aspects of Sirius XM’s cost structure are highly transparent and predictable. Although revenue share, royalties and content costs vary from quarter to quarter, transmission expenses and equipment costs tend to be relatively fixed, regardless of the number of subscribers of the company. The predictability of its cost structure often leads to consistent operating cash flow year after year. This is why Sirius XM can comfortably afford to distribute more than $400 million in dividends per year to its shareholders.

Another key difference between Sirius XM and traditional radio operators is how the former generates revenue. While terrestrial and online radio providers rely heavily on advertising, Sirius XM has historically generated less than 20% of its net sales from advertising. Most of its revenue comes from subscriptions.

As companies quickly cut advertising spending during economic downturns, consumers are less likely to cancel their satellite radio subscriptions. In short, Sirius XM is better positioned than its peers to weather economic turbulence.

The last piece of the puzzle is its valuation. As of the close on June 21, Sirius compared to its average for the coming year. earnings multiple over the past five years, and a discount of more than 40% to its average cash flow multiple for the past half-decade.

With a dividend yield of almost 4%, Sirius XM is the split stock I can’t stop buying.

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Sean Williams holds positions at Sirius XM. The Motley Fool ranks and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Check out the split stocks I’ve more than quadrupled my stake in this year (hint: it’s not Nvidia, Broadcom, or Chipotle Mexican Grill) was originally published by The Motley Fool