Hormel: Splits and Spam

02/05/2016 10:00 am EST

Focus: STOCKS

Neil Macneale III

Editor, 2 for 1 Stock Split

Neil Macneale explains the strategy behind his 2-for-1 Stock Split Newsletter; he also discusses the latest addition to his model portfolio, a time-tested "old economy" stock with leading brand names and a long history of consistent growth.

Steven Halpern: Joining us today is Neil Macneale, editor of the 2-for-1 Stock Split newsletter, which focuses exclusively on companies that have announced upcoming splits. How are you doing today, Neil?

Neil Macneale:  Just fine, thanks. How are you, Steve?

Steven Halpern:  Very good. Thank you for taking the time. To begin, could you give our listeners a brief overview of your newsletter and explain the rationale behind your strategy of investing in stock splits?

Neil Macneale: Right. Well, it’s been found in an academic study and by my own 19-year track record that companies that announce splits do outperform the market for a period of two to three years.  

The idea behind the 2-for-1 portfolio is that you have a list of 30 stocks and you keep them for two-and-a-half years.  You rotate them out over a period of 30 months.  It’s proved to work quite well.

Steven Halpern:  Now, interestingly, a stock split doesn’t necessarily change the value of the company, but you found that there are other factors underlying the decision behind a company’s split that may suggest why these stocks prove to be so successful.  

Neil Macneale:  Well, yes. I think you can think of it as legal insider trading really. What you have with a split announcement is the board of directors’ signal that they think the company is going to continue to do well for the foreseeable future.  It really is a view into the thinking of the board of directors.

Steven Halpern:  Now, you’ve noted that there have been a very limited number of split announcements recently.  How common is this situation and have you found in your experience over the years that the amount of splits suggests anything about the market?

Neil Macneale:  Well, there is a correlation, I think, between the mood of the economy and the number of stock splits.  When the mood is bad or down—I should say I guess—such as, for instance, 9-11 and after the 2008 housing bust, there were very few splits.  

That situation exists today I think, just because of the uncertainty in the world economy and perhaps the upcoming election when nobody knows which way we’re going to go on that. To answer your question, I think it’s a trailing indicator. It’s not a prediction of where the market’s going.

Steven Halpern:  Now, the latest addition to your model portfolio is Hormel (HRL). Could you give our listeners an overview of this company?

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Neil Macneale:  Well, Hormel is a gigantic food processing company. Everybody knows their brand names, Skippy Peanut Butter, and Spam, and Jenny-O Turkey, and so forth.  

It’s been in business quite a long time.  It’s a very well-run company, has an excellent balance sheet. Year after year, it turns in a great profit.  

The other thing I like about it is it’s not a flashy kind of a new economy high tech stock. It’s just a company that makes stuff that people want to buy.

Steven Halpern:  It’s interesting, in your latest report you called Hormel a great "old economy" company.  I would guess in the current environment you must see some odd comfort in a company whose products like Spam have stood the test of time.  

Neil Macneale:  Absolutely right.  Yeah, I like companies that make things that people need and will need forever, basically, and companies that do it well.  I mean, this company has returned consistent profits year after year. They’ve raised their dividend year after year. It’s hard to go wrong with a company like that I think.

Steven Halpern:  Interestingly, this new purchase of Hormel in your model portfolio is not the first time you’ve bought this stock.  What happened the last time that you recommended these shares?

Neil Macneale:  Well, Hormel was in the portfolio from 2010 through July 2013, and as I stated in the newsletter at the time, when I sold it, it was totally under the radar the entire time we owned it, yet it returned a 19.3% overall annualized return. You can’t complain about that.  

Steven Halpern: Now, in your latest issue, you shared some very intriguing commentary on what are known as reverse splits.  As an expert in the split market, could you explain to our listeners what reverse splits are and why you don’t consider these types of splits as possible candidates to your investment portfolio?

Neil Macneale:  Well, as I mentioned, a forward split—a 2-for-1 split or 3-for-1 split—is a signaling to the optimism of the board of directors. Conversely, a reverse split usually never happens unless the company’s in some kind of trouble.  

They either need to raise their share price in order to not be delisted from the Stock Exchange.  That’s a very common reason for a reverse split.  It’s generally a signal that there’s trouble in the board room.  

Obviously, that’s not a signal that you want to play on unless you like shorting stocks.  I don’t do that, but some people have found that to be a profitable thing.

Steven Halpern:  Again, our guest is Neil Macneale, editor of 2-for-1 Stock Split newsletter. Thank you so much for your time, today.

Neil Macneale: Oh, you’re welcome Steve. It’s always a pleasure.  

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