Celldex Therapeutics, Inc. (NASDAQ: CLDX) stock tanked Monday after the company effected a 15-to-1 reverse stock split that was first announced two days ago. Here’s a brief overview of everything investors need to know about the reverse split and why the stock is reacting to the downside.
The reverse split pushed Celldex’s share price from about 39 cents to about $5 per share, but the market’s negative initial reaction to the decision is typical of the response to reverse splits.
Celldex was forced into the aggressive reverse split after the stock crashed 84 percent in the past year as the market lost its optimism about immunotherapy combination treatments. Much of that crash occurred in April, when the company failed to meet its primary endpoint in a Phase II study treating metastatic triple-negative breast cancer.
The Nasdaq exchange requires a minimum share price of $1 for listing, so Celldex had no choice other than a reverse split to bring its stock back in good standing.
In its April SEC filing, Celldex management was frank with shareholders about the necessity of a reverse split.
“The primary reason for the reverse stock split is to allow us to attempt to increase the bid price of our common stock by reducing the number of outstanding shares of our common stock … delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations,” the company said.
Some institutional investors are forbidden from buying shares of stock priced under the $5 per-share and $1 per-share levels, but many would also balk at buying a stock that has lost 91 percent of its value in a one-year stretch.
Word Of Caution
Reverse splits are often a last-ditch effort for a company with nothing left to lose. Beyond maintaining their listings, stocks with share prices below $1 are seen by many traders as junk investments and dead-end companies.
Long-term investors especially should be careful about taking a stake in any stock following a reverse split. A recent study by Ibbotson & Associates found that reverse split stocks from 1926 to 2017 have underperformed the overall market by an average of 4.3 percent annually over the first five years following the reverse split.
According to splithistory.com, this reverse split is Celldex’s first in the past decade.
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