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Stocks That Split: Are They Worth Owning?

Have you ever heard of the 2 for 1 Index?

Started by California general contractor Neil MacNeale in 1996, it’s a passively active U.S. stock index that invests in approximately 30 holdings of stocks that have recently announced stock splits of two for one or better.

Why stock splits?

Research shows that companies that announce stock splits generally outperform those that don’t over an initial two- to three-year period.

Prior to starting the index and newsletter that’s based on the index, MacNeale had been trying to find a disciplined investment methodology that he could easily implement and maintain over the long haul—one that could also outperform the S&P 500.

He found it with stock splits and hasn’t looked back since. Putting $50,000 of his own money into the index originally, it’s grown to $383,000, or an annualized total return of 10.6%.

How does it work?

MacNeale buys one stock each month that’s announced a split at some point in the last three to seven weeks (it doesn’t matter when the stock actually splits) using a proprietary ranking system he’s developed to select the best possible stock among potential candidates; at the same time, he sells the oldest position in the portfolio.

He then repeats this process every month. Occasionally, he’s unable to buy a new stock. When that happens, he simply waits until the next month to find a candidate.

The problem with implementing MacNeale’s system here in Canada is that we just don’t see many stocks split two for one or better in a given year, let alone every month.

For example, in the month of August, three U.S.stocks split two for one or better, including Church & Dwight Co., Inc., one of the most consistent performers in the S&P 500. In Canada, only one stock—Andrew Peller Ltd., (TSX:ADW.A)—announced a split, and that was an exceptionally busy month.

As far as I can tell, there have been only three stocks (market cap > $100 million) that have split in 2016: Peller, Uni Select Inc (TSX:UNS), and Richelieu Hardware Ltd. (TSX:RCH). Performance-wise, two out of the three stocks have done well so far in 2016 with year-to-date returns of 59.7%, -12.3%, and 15.4%, respectively.

Two out of three isn’t bad.

Recently, the Ontario Teachers’ Pension Plan acquired the Canadian operations of Constellation Brands, Inc. (NYSE:STZ), which includes the Jackson-Triggs and Inniskillin wine brands as well as the Wine Rack retail stores in the province of Ontario.

Andrew Peller has been an acquisition target for several years. With the pension buying Constellation’s Canadian wine assets, it would make sense to also buy Peller and then take the whole thing public in three to five years, something Constellation considered before opting for selling the business.

Peller is worth owning until that happens.

Richelieu Hardware, the Quebec specialty hardware manufacturer and distributor, has consistently grown its revenue and earnings over the past decade. Since 2006, revenues and earnings have grown by 7.7% and 7% on an annualized basis, respectively.

It’s not flashy, but it’s delivered for shareholders over the long haul. I wouldn’t have a problem owning this stock as well.

Finally, although Uni-Select’s stock is down for the year, the Montreal company is doing a good job of profitably growing both its automotive paint business as well as its automotive parts-distribution business. As it continues to expand its paint business in the U.S., it will benefit from any drop in the Canadian dollar. Certainly, if Clinton wins the election, the greenback will strengthen, and that’s good news for Uni-Select shareholders.

Of the three stocks, this would be the most speculative in nature. However, buying Uni-Select on the dips as is happening this year will get you ahead in the long run.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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