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Friday, September 22, 2006

JDS Uniphase: The Problem With Reverse Splits

JDSU announced after than market closed that it would do an 8-for-1 reverse split that would cut its outstanding shares to 211 million. The stock price is currently $2.15,so, if the price remained unchanged, it would trade at about $18 after the effective date of October 17.

One of the reasons for the reverse may be that some institutions will not buy stocks that trade under $5. A number of small-cap stocks put this in the “risk factor” sections of their 10-Ks and other filings.

The company also said that with fewer shares, seeing meaningful changes in earnings per share will be easier for investors. Since most people on Wall St. carry a calculator that seems a bit thin.

Companies that do reverse splits usually are working from a position of weakness and often the action is part of a deteriorating financial situation. This is one of the reasons that these splits are much more common with bulletin board and pink sheet stocks than they are major Nasdaq actives like JDSU.

The move may actually turn out to hurt investors. JDSU is usually one of the 25 most actively traded stocks on Nasdaq, which gets it one daily lists at sites like Yahoo!Finance and weekly “most active” lists in publications like Barron’s. With the reverse, volume is likely to drop by 80% or so as the float contracts.

All in all, JDSU may have made the wrong call running a reverse.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies that he writes about.
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