The Zhitong Finance App learned that up to now in 2024, US stocks have enjoyed impressive gains. Thanks to the boost from the technology, energy, and pharmaceutical industries, the Nasdaq Composite Index and the S&P 500 Index have both risen by about 11%.

Steady performance growth and strong business fundamentals are often associated with rising stock prices, but there are other circumstances that will have an impact on trading activity. Normally, stock splits will cause brief abnormal fluctuations in stock prices. In recent years, many well-known companies including Nvidia (NVDA.US), Amazon (AMZN.US), Alphabet (GOOGL.US), Tesla (TSLA.US), Apple (AAPL.US), and Novo Nordisk (NVO.US) have completed stock splits.

Notably, in the past few months, a number of retail companies have also announced stock splits. Below, we'll explore the reasons for the split, its impact on stocks, and why Cost.US (COST.US) would be a potential candidate for a split.

Why did the company choose to split shares?

When a company chooses to split shares, the number of tradable shares will increase according to the number of proposed splits. For example, if a company announced a 3:1 split and investors owned 100 shares of the company before the split, they would own 300 shares after the split.

At the same time, although the number of tradable shares will increase according to the share split ratio, the stock price will also fall by the same coefficient. Following the example above, let's assume that investors held 100 shares at the price of $30 before the split, and once the split takes effect, they will hold 300 shares at the price of $10. As the number of shares increases, the share price will fall at the same rate, while the overall market value of the company will remain the same.

Generally speaking, stock splits are due to an exponential rise in the company's stock price. For ordinary investors, stocks have become out of reach, so trading activity is sluggish.

Although stock segmentation does not essentially change corporate value, many investors will see lower prices as an opportunity to buy stocks at a higher value. Essentially speaking, stock splits theoretically give a wider range of investors the opportunity to buy shares; otherwise, this group would be shunned by unbearable stock prices.

Why is Costco splitting shares?

In addition to big tech companies and healthcare companies, beverage manufacturer Celsius (CELH.US) and major retailer Walmart (WMT.US) have also had notable stock splits over the past year.

Recently, other companies adjacent to the retail industry have also proposed stock splitting plans. Specifically, the fast food chain Chipotle Mexican Grill is awaiting shareholders' approval of a 50:1 stock split plan. Meanwhile, Sony Corp. (SONY.US) also recently announced its intention to split shares.

From the image below, investors can see that Costco has been an excellent stock for the past decade. The stock price has surged nearly 600% and is now at $795, which is close to its all-time high.

Considering Costco hasn't had a stock split since 2000, plus its soaring returns and apparently expensive share prices, it wouldn't be surprising if management announced a stock split at some point.

No matter what happens, Costco is the place to buy

Looking at the stock price alone cannot directly determine whether a stock is overvalued. To truly understand the relative value of a stock, it is necessary to compare it with similar companies.

The chart above compares Costco to other large retailers and cost-conscious physical stores based on price-earnings ratio (P/E). According to this valuation index, Costco's price-earnings ratio is 52, which is the most expensive of its peers. Although the share price may seem pricey, the company is still an opportunity worth watching.

Currently, physical retail faces intense competition in e-commerce and online markets, but Costco has a unique position. The company has a large number of necessities of life, that is, goods and services that people need regardless of the economic situation.

Despite high inflation and borrowing costs, Costco's business is in an advantageous position. Additionally, higher valuation premiums than competitors also suggest that investors consider the company to be a leader among leading retailers.

The company is likely to split shares, but investors should not wait for the spin-off to arrive; this may also never happen. Conversely, considering Costco's position in large-scale retail and cost-focused retail, combined with its ability to actually benefit in an inflationary environment or other circumstances, it is also worth considering buying the stock now and holding it for a long time.