I'm lovin' LULU, and stock splits are great too

There haven't been a lot of splits to trade in recent years; nothing like the 1980s and 1990s, when arbitrage was king and the Nasdaq was hip.

As a potential split approaches for Lululemon -- the makers of hip, attractive athletic wear we'll be profiling in a future company report video -- we're reminded of those heady years, and some of the wiggles and quirks that one often sees. (Shareholders for Lululemon, stock symbol LULU, will vote on June 8 whether to execute a split in the stock's shares.)

There's a standard weakening in a stock's price as a split approaches. Two companies we've followed and occasionally had an interest in had just such a move in their pre-split phase: Baidu (BIDU), which split two for one on May 12, 2010, and Panera Bread (PNRA), which split on June 25, 2002. Both were off by 8 to 15 percent in the 10-15 day runup to the split.

This tendency was strong enough in the old days that you could actually trade it, if you were so inclined. Why so? That is, why didn't arbitragers fill in and take advantages of that tendency, and smooth things back to a classic, "efficient market"?

The short answer is, it appears markets aren't always efficient. The longer answer is, it's a good question, and I don't know the answer. In any case, it existed, and may well exist, or be underway already, for Lululemon.

Now, as a review of the Reagan-Clinton era splits suggests, you probably did even better if you bought and held the stocks than if you tried to trade the 10-15 percent move you often see.

The real reason for having some Lululemon is, it appears to be a well-run company that's producing a hot brand of clothing that's comfortable, good for working out in, stylish, and even a bit sexy -- one that seems to fit into a deeper social and economic trend towards personal fitness.

But if there's some weakening in LULU's price related to the split, one needn't be overly concerned. Indeed, if you like doing the splits, you may love doing them in your LULUs, and if you like LULUs, you needn't fear doing the splits.

Ownership disclosure: At the time this product was published or posted, Damon Vickers & Co. and Nine Points Capital Partners owned shares of Baidu, Inc. (BIDU) and Lululemon (LULA) and had no position in Panera Bread (PNRA).

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