3 stock splits you can count on

Empirical evidence suggests this investment strategy works.

By InvestorPlace Jun 25, 2013 10:31AM

iplogoArrow Up (© Nicholas Monu/iStock Exclusive/Getty Images)By Will Ashworth

There's a guy in San Jose, Calif., who makes money from stock splits. Neil Macneale's his name, and he has been writing his 2 for 1 Newsletter since August 1996.

A contractor by trade, Macneale put $50,000 into an IRA, and during the next 13 years it gained 452.4% through the end of May compared to 241.7% for the Vanguard 500 Index Fund (VOO).

Traditional thinking suggests that stock splits -- especially the 2-for-1 variety -- do nothing to add economic value to a stock. It simply doubles the number of shares outstanding. Think again. Two university professors from Columbia and the University of Illinois released a study in 2012 that studied stock splits between 1988 and the end of 2007. The professors found that stock splits foreshadow sustainably strong earnings.

Macneale is living proof the study wasn't a fluke.

To build your own fund, Macneale suggests buying a stock that has split 2-for-1 or higher (3-for-1, etc.) every month ($1,000 per stock) until you own 30 stocks. Once you've got your portfolio in place, maintaining it becomes real simple. Each month you sell the oldest stock, replace it with a stock that has split in the same month, then repeat the process in subsequent months.

It's idiot-proof. Well, sort of.

You still have to decide which stocks to pick. There are slim pickings in some months, and hard decisions in others. But in the end, I think you'll do just fine.

So far in 2013, there have been 19 stock splits of 2-for-1 or greater, with four more scheduled in the next week. Here are my three favorites:

First pick: AO Smith

AO Smith (AOS) is up roughly 10% since April 15, when it announced a 2-for-1 stock split payable May 16.

The maker of water heaters has been a favorite of mine (InvestorPlace) for several years primarily because of its manufacturing policy, which has it making products in the countries where it plans to sell those products. Although its business in China and India is growing rapidly, it still generates a majority of its revenue in the U.S. Most of what it sells here it makes here. It doesn't rely on its Asian plants for its U.S. production -- those plants are meant for domestic production in China and India. It does the same in Canada.

It's possible that could change, but until it does, I can't think of a better stock to own in the industrial goods sector.

Second pick: Whole Foods

Regardless of what you might think of John Mackey's antics, you have to love the job he has done as founder and co-CEO of Whole Foods Market (WFM). Since going public in January 1992, its stock has achieved an annualized total return of 18.4% -- 910 basis points greater than Wal-Mart (WMT), which wasn't nearly as big back then as it is today. That's quite an accomplishment.

Whole Foods -- which has split four times since 1992, including its most recent 2-for-1 split on May 29 -- continues to grow its business in a methodical manner, increasing same-store sales for 14 consecutive quarters. Since the second quarter of 2008, it has increased its average weekly sales per store by 27% to $725,416. It's for this reason it keeps growing earnings by 20% annually or more.

With the health-food craze now a normal part of everyday life, the future is very bright indeed.

Third pick: Lorrilard

My last pick isn't going to win any awards for bettering mankind, but it certainly has the attention of income investors across the country.

Lorillard (LO), which was spun off from Loews (L) in June 2008, has paid out $8.21 in dividends since becoming an independent company. In January, it split 3-for-1; since then, its stock is up 12%.

The most interesting aspect of a Lorillard investment is its April 2012 acquisition of Blu eCigs for $135 million. The American electronic cigarette market is estimated to be worth as much as $1 billion,  and Lorillard now controls 40% of the market share. While its sales in the second quarter were just $57 million along with $7 million in operating income compared to $1.5 billion in revenue and $550 million in operating income for its regular cigarettes, it still has great potential. Especially since e-cigs are a much safer alternative to the real thing.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

More from InvestorPlace

Jun 25, 2013 12:29PM
EXACTLY !!!!!!!!!!!!!!!!  BOOT his behind
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