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Monday, October 16, 2006

JDS Uniphase: The Reverse Split Fantasy (JDSU)CIEN)

Reverse splits are becoming all the rage with large telecom equipment suppliers. Ciena completed its reverse 1-for-7 split on September 25. The stock has dropped from $29.68 that day to $25.56. Nice results.

Reverse splits area almost always done by pink sheet or bulletin board stocks. Recently a number of tiny companies like HE-5 Resourses, Genaera, and Simtek have made the move. Investors may not have heard of these companies because no one else has.

Some companies on the Nasdaq who fall below the $1 level requires by the exchange also do reverses because the move allows them to keep their listing.

Ciena made the move, they say, so that earnings per share numbers would be more meaningful and the stock would appeal to a wider spectrum of shareholders. Some institutions will not buy stocks that trade under $5.

JDSU, which trades just above $2 has given similar reasons. But, there are several arguments for not doing a reverse. One is that individual investors often feel that they can “afford” a $2 stock more easily that one that trades for $80 or $90. That is, of course, nonsense unless a trader can only afford five or ten shares of the less expensive stock, but investing is not always rational.

The second, and more important reason for not doing a reverse, at least in Ciena and JSDU’s cases is that both were among the most widely traded stocks on Nasdaq which gets that companies regular exposure on most active lists from Yahoo!Finance to Barron’s. And, that is exposure money can’t buy.

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

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