AIG Reverse Split = Death to Shares

Thursday, July 09, 2009

Just when it wasn't thought possible to further hurt shareholders, AIG did it again. On July 1st, AIG administered a reverse 1-for-20 stock split. Shares that were trading around $1.50 were brought back to a tradeable price of $30. AIG management apparently did not understand the ramifications of their action.

Let it be a lesson to other companies. AIG brought itself back on the screens of daytraders. The common equity has taken another 65% hit in 8 days! Daytraders have difficulty profiting from very cheap stocks because of the transaction costs relative to the total equity used. So, by raising the price traders could once again profit from short positions. And, how they've profited!

Forget fundamentals here, this is all about momentum trading. When a stock is very cheap, it generally falls out of play and bases while the company attempts to turn itself around. AIG's reverse split was an invitation back to the late-2008 shorting party daytraders had. What a foolish move by management!


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