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

Many retail investors might shy away from higher-priced stocks that cost hundreds or thousands of dollars per share. Even though most brokerages now allow investors to buy fractional shares of those stocks, some investors might still prefer to buy round lots (100 shares) at lower prices because they’re easier to keep track of.

To reach those smaller investors, a lot of companies split their stocks to make them easier to trade. These stock splits don’t change the underlying value of the company, since they merely break a single share into smaller slices, but they can make it easier to trade options or fund employee stock-based compensation plans. They also tend to generate a lot of media buzz and attract fresh interest from short-term traders.

None of those factors should matter to long-term investors. But if we look at the fundamentals, I believe one of these stock-split stocks is worth buying right now — while another one should be avoided.

The stock-split stock to buy: Chipotle Mexican Grill

Chipotle Mexican Grill (CMG -1.34%) executed a 50-for-1 stock split on June 26. That represented its first stock split since McDonald’s spun off the fast-casual restaurant chain in an IPO in 2006.

Chipotle’s stock price had more than doubled to nearly $3,300 in the three years leading up to its split, so it made sense to break up its shares into easier-to-trade slices. Yet I believe Chipotle’s stock is still worth buying for three simple reasons.

First, it’s still opening new stores. Its year-end store count rose from 2,768 in 2020 to 3,437 in 2023, and it plans to open 285 to 315 new locations this year. Second, its comparable store sales are rising — so its new locations are sustainable, and it isn’t merely driving its sales growth with new store openings. Lastly, its annual restaurant-level operating margins have expanded over the past three consecutive years as it raised its menu prices to offset the inflationary headwinds.

From 2020 to 2023, Chipotle’s revenue grew at a compound annual growth rate (CAGR) of 18% as its EPS increased at a CAGR of 53%. Looking ahead, it expects its rising digital orders (36.5% of its sales in its latest quarter), the stickiness of its loyalty program, installations of more drive-thru Chipotlanes, and its overseas expansion into Europe to fuel its long-term growth. Analysts expect its revenue and earnings to grow 15% and 23%, respectively, this year. It stock certainly isn’t cheap at 58 times forward earnings, but I believe its impressive growth rates justify that premium valuation.

The stock-split stock to avoid: Sony

Sony (SONY 0.42%) plans to execute a 5-for-1 split for both its Tokyo-traded shares and New York-traded American Depository Receipts (ADRs) on Oct. 1. That will mark the Japanese conglomerate’s first stock split in more than two decades.

Sony’s revenue grew at a CAGR of 13% from fiscal 2020 to fiscal 2023 (which ended this March) in yen terms. That growth was largely driven by the expansion of its gaming, music, movies, and image chipmaking businesses.

But for U.S. investors, most of that growth was offset by the dollar’s record rally against the yen. That’s why Sony’s Tokyo-listed shares rallied 29% in yen terms over the past three years — but its U.S.-listed ADRs declined 15%. So unless the yen finally stabilizes against the dollar, I think it’s still too risky to buy Sony’s ADRs.

Even if we look past those currency headwinds, we’ll notice that Sony’s growth is slowing down. For fiscal 2024, it anticipates just 1% revenue growth (after excluding its upcoming divestment of its Financial Services division) in yen terms, as the expansion of its image chipmaking and music divisions only partly offsets the slower growth of its gaming and consumer electronics divisions. It expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to only increase 6% for the year — compared to its CAGR of 20% from fiscal 2020 to fiscal 2023.

Sony’s ADR shares might seem historically cheap at just 17 times forward earnings and 9 times its adjusted EBITDA. But it could continue to trade at that discount as long as the yen keeps declining and its core growth engines fizzle out. So for now, a stock split won’t solve any of those issues or make it a more appealing investment.

This post appeared first on fool.com

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