Another reverse stock split for Seattle-based Cell Therapeutics?

Jul 10, 2012

Stock splits are often a sign of a booming economy. But these days, many companies are experiencing reverse stock splits. 

On this week's Money Matters, financial commentator Greg Heberlein tells KPLU's Dave Meyer that Seattle's Cell Therapeutics appears to be a prime candidate for a reverse split.

Since the stock-market plunge that began in 2008, a number of stocks have executed reverse splits in order to ensure their shares could still be traded on the nation’s primary exchanges.

If you own a $10 stock and it does a conventional 2-for-1 split, you now own two shares at $5 apiece. In a reverse split, the opposite occurs. Two shares of a $5 stock in a 1-for-2 reverse would leave you with one share of a $10 stock.

Perhaps the most notable reverse split was Citigroup, once a member of the 30-stock Dow Jones industrial average. Last year, Citigroup’s price dropped below $5. That wouldn’t get it delisted, but it meant many big investor pools couldn’t own it because of its low price. So Citigroup executed a 1-for-10 reverse split, hoisting its price from about $4 to $40.

Here in the Northwest, four reversals have occurred in the past year. One, Cell Therapeutics, has done it three times in the past five years. Cell has raised more than $1 billion from investors in the past 15 years, and has yet to record an annual profit in its two decades on earth. Its search for a blockbuster drug remains elusive.

Cell’s three reverse splits have kept its head above water. The most recent, a year ago, allowed stockholders to get one new share in place of six already held. To account for that, the then stock price of about 25 cents jumped to a little more than $1.50.

Two pieces of bad news have struck the stock in recent weeks. NASDAQ, the exchange on which Cell trades, told the company on June 29 that it has six additional months to boost the stock price above $1. After a delisting, the shares may still be traded, but they are no longer in widely published stock tables. That’s bad for a company’s image, complicates efforts to raise more cash, and makes the shares harder to trade.

Meanwhile, a major index that holds Cell stock says that as of June 25 it has dropped the shares. Russell Investments, based in Seattle, says the shares no longer are a part of its Russell 2000 index. 

Another concern: when the Russell and Nasdaq news broke, five executives and directors sold more than a half-million shares. That’s not illegal, but it is something investors should pay attention to.

An untoward effect of a reverse split is that all of the stock prices in the past are refigured to account for the splits. 

Twelve years ago, Cell’s share price peaked at $77. That makes the current price look small.  But that is nothing compared with the adjusted price. After you factor in a 1-for-6 split, and a 1-for-10 split and a 1-for-4 split, that $77 share price balloons to more than $18,000! 

In the investment world, that’s not a good thing. 

You can see a graph showing the incredible rise and fall of Cell Therapeutics at Yahoo! Finance.