I can remember the good times for technology and venture capital company CMGI (Nasdaq:CMGI). This was back during the dotcom boom.The company had its hand in numerous hi-tech businesses, all with the potential to flourish and grow. Investors were going to make boat loads of money. Life was good.

But things have changed quite drastically for CMGI since the turn of the millennium. The so called "internet incubator" used to be trading well over $100 per share and its CEO, David Wetherell was all but walking on water. The the bubble burst and CMGI was no longer the darling of Wall Street. Now its stock is trading just north of a buck and change.

Rather than funding countless start-ups in hopes of selling them later for billions, the company is now focused on providing supply-chain management services and it's struggling to earn consistent profits.Despite the company's efforts, its expected to earn just 6 cents per share in fiscal 2008 and 16 cents per share in fiscal 2009, which even for a stock that trades at around $1.40 isn't overly cheap in my opinion.

Reverse Split Hurts Investor Psyche
What really caught my eye, and what really got under my skin was the company's recent announcement that it is planning on doing a 1-for-10 reverse split effective November 1.

The reverse split is disturbing to me, because over the last couple of years a lot of retail investors (people like you and me) have gotten involved in this stock with the idea that they were picking up a quality company on the cheap, and that ultimately the stock would ascend on the company's operational merits.

It hasn't ascended. And now, with the reverse split, investors that have been loyal will see their share counts drop drastically. In other words, investors who owned 1,000 shares will now have just 100 shares post split. Although this won't affect the dollar amount of their holdings or the company's market cap, it is likely to be a psychological blow. Now for every buck the stock goes up, that investor will get $100. That's a far cry from $1,000.

People buy $1 stocks for a reason - because they can make a killing on even a quarter or a half point!

Now, I know the theory that unless the company trades at $5 or $10, the majority of institutions won't be interested in them. I understand the theory, but from what I've seen, reverse splits are far too often the kiss of death. (For related reading, see The Pros And Cons Of Institutional Ownership.)

To illustrate the point, JDSU (Nasdaq:JDSU) has been dead money after it completed a 1-for-8 reverse split back in October, 2006. This is despite the fact that the general market has fared pretty well. I worry that CMGI could be headed down a similar path.

The Bottom Line
CMGI has really disappointed me. While the company deserves credit for its attempts to generate a profit and renounce its dotcom ways, in my opinion it has done a lousy job of talking about that strategy with the Street. The recent announcement that it's going to do a reverse split seems like a slap in the face, particularly for smaller investors.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Entrepreneurship

    Top 5 Most Successful Swedish Entrepreneurs

    Understand what makes Sweden a great place for entrepreneurship. Learn about five successful Swedish entrepreneurs who are making big impacts.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Entrepreneurship

    Top 5 Most Successful Mexican Entrepreneurs

    Understand why so many socially conscious entrepreneurs have come out of Mexico. Learn about the top most successful Mexican entrepreneurs.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!