Investors have flocked to stock-split stocks -- especially those conducting forward splits.
The market's most-attractive stock-split stock for May has spent close to $26 billion to repurchase more than 59% of its outstanding shares since 2011.
Meanwhile, the prospect of an artificial intelligence (AI) bubble brewing spells trouble for a fast-growing networking solutions company.
For more than 30 years, there have been a number of next-big-thing trends and innovations that have captivated the attention of professional and everyday investors. Though the rise of artificial intelligence (AI) has been the primary market mover for more than two years, it hasn't been the only trend responsible for lifting Wall Street's major stock indexes to new heights.
In 2024, the other major trend that played a close second fiddle to the AI revolution is excitement surrounding stock splits.
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A stock split is an event that let's publicly traded companies adjust their share price and outstanding share count by the same factor. Keep in mind that altering a company's share price and share count is purely superficial and doesn't have any impact on its market cap or operating performance.
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The reason investors have swooned over stock-split stocks is because a certain type of split has historically led to big-time returns. Based on data from Bank of America Global Research, companies conducting forward splits -- this type of split lowers the share price to make it more nominally affordable for everyday investors -- have averaged a 25.4% return in the 12 months following their split announcement since 1980. For the sake of comparison, this is more than double the average annual return rate of the S&P 500 over the same stretch.
While stock-split stocks can be a source of outsized returns, it doesn't mean highfliers completing a forward split are necessarily worth buying. As we motor into May, one supercharged stock-split stock stands out as a no-brainer buy, while another looks to be on shaky ground and can be avoided.
The phenomenal stock-split stock to buy hand over fist in May: O'Reilly Automotive
The stock-split stock that makes for a genius buy as we kick off May is none other than the first high-profile company to announce a forward split in 2025: auto parts supplier O'Reilly Automotive(NASDAQ: ORLY).
On March 13, O'Reilly's board announced plans to conduct a 15-for-1 forward split, which will go into effect after the closing bell on June 9, assuming its shareholders approve the split at the company's annual meeting on May 15. A 15-for-1 forward split will reduce O'Reilly nominal share price from nearly $1,400 to around $90 per share. Retail investors who lack access to fractional-share purchases through their broker will have a much easier time opening a position, or building up their stake, in O'Reilly Automotive stock after June 9.
One reason O'Reilly stock has been unstoppable for decades is the steady aging of U.S. vehicles on American roadways. Based on a May 2024 report from S&P Global Mobility, which is a division of the better-known S&P Global, the average age of cars and light trucks in 2024 reached an all-time high of 12.6 years. This is up from an average age of 11.1 years in 2012. Drivers hanging onto their vehicles for a longer time frame plays right into O'Reilly's hands, as its parts and products will be increasingly relied upon by consumers and mechanics to keep aging cars and trucks in tip-top shape.
Another thing investors can appreciate about O'Reilly Automotive is that it's generally recession- and tariff-resistant. If U.S. economic growth weakens or shifts into reverse, consumers are likely to avoid big purchases and keep their vehicles longer. Likewise, the prospect of higher prices on some new vehicles, as a result of President Donald Trump's tariffs, should encourage drivers to hang onto their existing cars, SUVs, and trucks.
O'Reilly Automotive's enviable outperformance is also a reflection of its hub-and-spoke distribution model meeting its customers' needs. O'Reilly's 31 distribution centers are centrally located around nearly 400 hub stores (the "spokes"), which can quickly funnel around 153,000 stock keeping units (SKUs) to local stores on a same-day or overnight basis.
The icing on the cake for investors is that O'Reilly Automotive has one of the most-effective share-repurchase programs among public companies. Since introducing its buyback program in 2011, the company has repurchased $25.94 billion worth of its common stock and retired 59.4% of its outstanding shares. Companies with steady or growing net income (like O'Reilly) should enjoy a healthy boost to their earnings per share (EPS) as a result of an aggressive buyback program.
Image source: Getty Images.
The stock-split stock to shy away from in May: Arista Networks
On the other end of the spectrum is a tech outperformer that may struggle to live up to the hype in the coming quarters. I'm talking about cloud networking solutions provider Arista Networks(NYSE: ANET).
Arista's board announced a 4-for-1 forward split on Nov. 7, which is when the company's third-quarter operating results were presented. Shares began trading on a split-adjusted basis after the closing bell on Dec. 3, 2024, which at the time reduced Arista's share price from nearly $422 to a more nominally palatable $105 for investors who can't purchase fractional shares.
On the surface, there's a lot to like about Arista Networks. For one, it's playing a key role in the evolution of AI in the networking space. The company's hardware and software connect graphics processing units (GPUs) and servers, which aid in making computing more efficient. The rapid expansion of AI-accelerated data centers plays right into Arista's proverbial hands.
Arista's sustained sales growth rate of nearly 20% is also giving investors ample reason to smile. In particular, service revenue surged by 35% in 2024 to $1.12 billion. This segment sported a juicy 81% gross profit margin last year.
But if investors dig beneath the headlines, they'll find reasons to be skeptical about Arista Networks' near-term outlook.
One of the biggest concerns for Arista is the possibility of the AI bubble bursting. Every next-big-thing technology and innovation for more than 30 years has navigated an early stage bubble-bursting event, and there are no indications that artificial intelligence is going to be the exception to this unwritten rule. The simple fact that most businesses haven't yet optimized their AI solutions and/or aren't generating a positive return on their AI investments signals that investors have, once again, overestimated the early adoption and utility of a potentially game-changing technology.
Macro factors aren't working in Arista Networks' favor, either. According to the Atlanta Federal Reserve's GDPNow model, first-quarter gross domestic product (GDP) for the U.S. economy is projected to decline by 2.4%, as of an April 24 update. This would mark the worst organic, non-pandemic, contraction for the U.S. economy since the Great Recession in 2009. If the U.S. economy weakens, demand for Arista's products wouldn't be immune.
Lastly, even though Artisa Networks' stock has come down from its peak, a still-rich price-to-sales multiple north of 14 suggests there's room for further downside.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Arista Networks, Bank of America, and S&P Global. The Motley Fool has a disclosure policy.
