1 Stock-Split Stock to Buy Hand Over Fist in May and 1 to Avoid

Source The Motley Fool

The mere fact that a company recently executed a stock split isn't much of an investment thesis. The move neither creates nor destroys bottom-line profits or shareholder value -- it simply lowers the stock price by dividing the same business value into a larger number of equal slices.

That being said, stock splits often give the stock a short-lived price boost as the split attracts media attention -- and the decision can speak volumes about how the leadership team expects the stock to perform in the future.

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So, stock splits don't really change my analysis of any given stock but they can draw attention to some surprisingly swift share price gains. Some are well-deserved, highlighting a solid investment idea. Other stock splits might be too hasty, setting buyers up for potential disappointment.

I think I see examples of both in the current market. O'Reilly Automotive (NASDAQ: ORLY) looks like a strong buy with a 15-for-1 stock split scheduled for June 9. Digital payments processor Sezzle (NASDAQ: SEZL) strikes me as a speculative idea after its recent 6-for-1 split.

Can Sezzle keep sizzling?

Do consumers need another buy now, pay later solution? That's Sezzle's core product, in direct competition with better-known alternatives like (takes a deep breath) Klarna, Block's Afterpay, Affirm (NASDAQ: AFRM), Zip, American Express (NYSE: AXP) Plan It, Visa (NYSE: V) Installment Solutions, and dozens of other options.

It's a small fish in a big pond. Sezzle processed $2.5 billion of gross merchandise volume (GMV) last year. That sounds like a lot until you look at Klarna's $102 billion GMV in the same period, or Affirm's $26.6 billion. True giants like American Express and Visa measure their annual GMV in trillions of dollars.

Sezzle isn't a bank or a credit card processor, like many of its larger rivals. It's a financial technology business, based on its digital payment systems. It's also a very opportunistic company. Quick bank transfers and cashback rewards programs were the original product portfolio in 2016, but management switched to the red-hot delayed payment programs market in 2017. Sezzle's stock was first listed on the Australian stock exchange, though the company was founded in Minnesota.

I don't see a stable long-term plan here. The stock isn't exactly robust, either.

Sezzle's market value was just $287 million at the end of April 2024. One year later, it's up to $1.7 billion -- and that's after a 40% price correction in December. Sure, the business is growing by leaps and bounds. However, I'm not sure the good times will last in the long run. Wall Street is littered with memories of fast-growing technology stocks that ran out of rocket fuel.

Slicing a pizza.

This pizza will be just as tasty whether you cut it in 6 or 12 slices. That's how stock splits work, too. Image source: Getty Images.

I don't know for sure that Sezzle will join that gloomy group. Bullish investors might point to the company's sizzling revenue growth and large target market, not to mention a pretty reasonable price-to-earnings ratio. At the same time, Sezzle faces a massive amount of deep-pocketed competition -- and the bigger names have a head start. The largest e-commerce stores may accept Sezzle payments. However, they all make it easier to use Affirm's pay-over-time services in their own checkout services.

I'll be surprised if Sezzle's stock rises much higher, or if the payment service is still around in five years. Sezzle is free to prove me wrong, but this stock split seems short-sighted.

Why a stock split makes sense for O'Reilly

O'Reilly is a different story.

Yes, the auto parts industry is also packed with competitors, but O'Reilly is the biggest name in the business with a massive $79 billion market cap. The stock has gained 31% over the last year, leading the car parts retail industry and outperforming the S&P 500 (SNPINDEX: ^GSPC) market index.

This stock split makes sense, given the rapid price gains and beefy stock price. Changing hands at $1,383 per share on April 29, some small investors may have to save up for a single O'Reilly share. The stock will trade for roughly $100 per share after the upcoming 15-for-1 split, making it more affordable to people with double-digit or low triple-digit investing budgets.

The company's last stock split was a simple 2-for-1 affair in June 2005. There's nothing rushed about this announcement.

And O'Reilly's big gains were no accident. It is the fastest-growing company in this field, with sector-leading profit margins as well. That's a rare and lucrative combo.

So I wouldn't buy O'Reilly Automotive stock just because of the scheduled stock split. It's just a rock-solid market leader with fantastic growth prospects. If the stock split makes it easier to add this high-quality investment to your portfolio, that's just the cherry on top.

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American Express is an advertising partner of Motley Fool Money. Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, Sezzle, Visa, and Zip Co. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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