Should You Buy On A Bonus/Split Announcement?

At the Moneyoga blog, Kaushik has a post on a strategy: Buying Bonus/Split stocks, Profitable?

The strategy is simple: When stocks announce a bonus or a split, the popular belief is that you should buy these stocks, because they will increase post bonus/split. We test this belief by running a check through all such announcements in the past, and checking prices against, say, the Nifty through the same period. The results are here:

What does this mean?

• Buying a stock on a bonus/split announcement is NOT as profitable as it seems. In fact it barely matches the Index gain in the same period, with a far larger "drawdown" - meaning that at some point in the middle you would have lost more than if you had invested in the Nifty.
• The only way to really profit, with perhaps a small advantage to the Nifty is to buy large cap stocks on a bonus/split announcement and hold for a year. Buying smaller caps and holding on for shorter periods seems to have more risk than return!
• You will hear a lot of exceptions. Stocks like JP Associates, Jai Corp, GMR etc. have done amazingly since their split or bonus announcements but it isn't quite the case if you consider the universe of all stocks.
• Meaning, you hear about the good ones, but nobody cares to talk about the bad ones. So you get a skewed view. This is common in the stock market, where there are more stocks than you can track in your head. So you have to use technology to VERIFY a thought process - and this kind of research does exactly that.
• It may seem like - big deal, what are these Moneyoga guys doing? Telling me what DOESN'T work. That is of no use, why don't they tell me what DOES work? We will, but in the process we have to eliminate what doesn't, and to test popular beliefs and see if they are indeed correct.
• Look also at Sunil's post on the popular belief that FII's sell in December. Another myth, perpetrated by the "feeling" that FIIs need to book profits in December as they close accounts for the calendar year, has been debunked. (In fact I met Sunil in Mumbai recently; indeed a pleasure and an honour
  )
• So don't believe in popular sayings - test them thoroughly. You may see different results.
• Does it now mean that you should SHORT-SELL a bonus-split stock post announcement? That is an interesting thought, let us check that as well.

Related posts:

1. Bonus shares: A tax saving scheme? Lots of Indian companies offer "bonus" shares: a 1:1 bonus...
2. BHEL announces a 1:1 bonus BHEL has now announced a 1:1 bonus - that means...

This entry was posted on Monday, December 24th, 2007 at 6:48 AM and is filed under Moneyoga, Stocks. You can subscribe to any comments to this entry via RSS 2.0. You can leave a response, or trackback from your own site.