A simple and small survey of the SP500 was conducted to evaluate the basic law of supply and demand in economics 101. Those stocks with the largest changes in the their float were collated to tabulate the results. There was no effort made to subject this survey to the rigors of a scientific study and therefore no statistical relevance was determined. This survey was initiated simply to test the theories of economics class 101.
For those of unfamiliar with a company's float, it differs from a company's shares outstanding in that it represents the number of shares that are available to the investing public. In case you weren't aware of this fact, a company that has a million shares doesn't necessarily mean that all of its shares are available for trading. Some may owned by the company itself through previous stock repurchases known as stock buybacks. It may have given away many shares in the form of stock options as incentives to entice employees. Plus, a company may even re-issue stock through a secondary offering. This of course gets quite complicated in today's world of high finance, but the important fact is that the float represents the net result of all of these transactions. This quantity was chosen because it easily summarizes all of the changes that a company makes to it stock.
The following table shows you the component stocks in the SP500 that made the largest increases and decreases to the number of shares available to trade. The prices shown represent adjusted closing prices so that dividends and stock splits are reflected in the price. These prices represent the total return an investor would have received. In addition, it only seemed fitting to compare May 2004 to May 2003 since they were both strong advancing months.
Interestingly, when you compare the group of increasers to decreasers, it appears as though the odds are in your favor to buy stocks that increase their float. This of course is too small a sample to make any definitive statements, but when you compare the non-split group of increasers to the decreasers, the increasers still seem to produce larger gains. This of course defies Economics 101, which states that when supply outpaces demand, prices should decrease. Therefore we can deduce that demand increased at a faster rate than supply, or can we make this deduction?
In an effort to quantify demand, the monthly volume from May 2003 was compared to the monthly volume of May 2004. This is displayed in the column "Vol Chg". Notice that the non-split average was a decrease in volume of 8.2% while those stocks that split or merged saw a huge increase in trading volume.
In summary, those stocks with the largest decreases saw an average decrease in their supply by 5.4% while their trading volume remained about the same. Interestingly, prices rose 18.7%. This is at least consistent with economic theory. As for those stocks that had the largest increase in their float, they were divided into two groups: those that had stock splits and those that didn't. The non-split increasers, their supply increase by 24% and their trading volume decrease by 8%, but yet prices rose 24.4%. This gain doesn't make any sense with regards to the basic laws of supply and demand and therefore there must be another reason to explain these companies rise in price besides economics 101. As for those stocks that split and increased their float by an average of 130%, the trading volume increased by 270% and prices rose an average 76%. It's interesting that this group did follow the basic theory of economics as demand outpaced supply.
Perhaps now you can understand, a long held view on Wall Street of buying stock of companies that are going to split. They buy these companies because they tend to rise in price regardless of other factors. This is in no way an endorsement of this simple strategy, but these preliminary data do demonstrate why investors follow this method of stock selection. What's also interesting to note is that there are strategies based on buying companies that show a decrease in their float. This strategy too showed promising results, but is more difficult to implement as it is fraught with data acquistion problems (knowing when a company repurchases its own shares is typically a closely guarded secret, except to the specialists or market makers).
At first, glance it appears that it would be an easy method to select stocks. Just select those companies that announce stock buybacks, or issue reverse splits, etc. This is problematic as company's make announcements frequently but aren't required to complete those well intentioned transactions. The completition of these transactions aren't as stable and predictable as a stock split. In contrast, a stock split is real and definitive. It's an all or none deal while stock buybacks can be announced and either rescinded or abandoned midway. Often times stock buybacks are associated with an increase in dividend payments so these two events are linked. Many times when dividends are reduced, companies stock repurchase plans are also reduced or abandoned.
While this serves as an introductory example of how companies stock prices today are responding to net changes in their float, these observations do not attempt identify other internal or external forces, or realities, that might influence stock prices such as an individual company's performance, tax law changes, interest rate environment, etc. This survey simply calls your attention to another facet of investing that you may not have considered in your analysis and when you examine each of the companies individually, you might find that the laws of supply and demand don't hold up, and lead you to the conclusion that there are other forces governing price.
As a matter of fact, there is some preliminary evidence that trading volume may not be the true measure of demand as the NYSE's trading volume now consists of two types of trading activity: traditional trading and program trading. The impact of program trading can not be fully understood at this time because the NYSE at this time does not specifically define what is occurring with 3 Billion shares a week traded by the large brokerage houses. That represents 50% of the weekly trading volume. So trading volume which was considered to be the measure of demand, may now in fact be a diluted quantity and a fuzzy measure of demand. The only way to know is to press Congress to increase the level of disclosure by the exchanges so that all investors can fully assess the economic forces at work.
Largest Float Increases |
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| Adj. Close | Adj. Close | |||||
| 4/30/03 | 5/28/04 | Float Chg | Price Chg | Vol Chg | ||
| BAC | 70.54 | 82.33 | 35.3% | 16.7% | ||
| BSX | SS 2:1 | 21.52 | 44.3 | 73.3% | 105.9% | 111.6% |
| EBAY | SS 2:1 | 46.46 | 88.8 | 82.8% | 91.1% | 34.3% |
| EMC | 9.09 | 11.24 | 9.6% | 23.7% | 4.2% | |
| EXC | 24.6 | 33.3 | 101.7% | 35.4% | 24.8% | |
| FON | Merger | 11.06 | 17.63 | 55.5% | 59.4% | 49.1% |
| GE | 28.71 | 31.12 | 2.2% | 8.4% | 6.4% | |
| IGT | SS 4:1 | 21.32 | 39.4 | 301.2% | 84.8% | 1274% |
| LU | 1.8 | 3.57 | 5.7% | 98.3% | -47.5% | |
| MMM | SS 2:1 | 60.98 | 84.56 | 99.7% | 38.7% | 5.7% |
| MSFT | 25.43 | 26.23 | 2.7% | 3.1% | -47.0% | |
| SLM | SS 3:1 | 36.2 | 38.14 | 184.0% | 5.4% | 371% |
| VIAB | 43.15 | 36.89 | 11.4% | -14.5% | 18.4% | |
| YHOO | SS 2:1 | 12.39 | 30.66 | 112.3% | 147.5% | 43.6% |
| Average | 77.0% | 50.3% | 130.9% | |||
| Correl. Coeff. | 31% | |||||
| Non-split Average | 24.1% | 24.4% | -8.2 | |||
| Split Average | 129.8% | 76.1% | 270% | |||
| SS=Stock Split | ||||||
Largest Float Decreases |
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| Adj. Close | Adj. Close | |||||
| 4/30/03 | 5/28/04 | Float Chg | Price Chg | Vol Chg | ||
| CSCO | 15 | 22.37 | -4.1% | 49.1% | -10.2% | |
| G | 29.88 | 43.09 | -5.4% | 44.2% | -29.1% | |
| IBM | 84.11 | 88.59 | -2.3% | 5.3% | -27.2% | |
| LTD | 14.1 | 19.18 | -7.8% | 36.0% | 7.4% | |
| MMC | 46.48 | 44.12 | -7.3% | -5.1% | 44.6% | |
| PFE | 30.05 | 35.34 | -4.1% | 17.6% | -40.6% | |
| TJX | 19.08 | 24.91 | -11.4% | 30.6% | -34.7% | |
| WM | 37.98 | 43.9 | -6.7% | 15.6% | 62% | |
| WMT | 55.78 | 55.73 | -1.6% | -0.1% | 10% | |
| WYE | 42.33 | 36 | -6.3% | -15.0% | 12.6% | |
| XOM | 34.04 | 43.25 | -2.2% | 27.1% | 2.3 | |
| Average | -5.4% | 18.7% | -0.3% | |||
| Correl. Coeff. | -13% | |||||
Last Updated on 6/21/04
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