Should You Buy Into Chipotle's 50-for-1 Stock Split? Maybe...

The big news surrounding Chipotle Mexican Grill (NYSE: CMG) lately has been its huge 50-for-1 stock split, which took effect at the opening of trading on June 26. Normally, stock splits are way smaller, like 2-for-1 or 3-for-1, so this one was an interesting development. But investors have to step back and understand what exactly is going on. On one hand, a stock split isn't as important as it sounds, but on the other, it might still be important to Wall Street.

Chipotle gave shareholders 50 shares for each one they owned

There are different ways that stock splits are managed, but the most basic concept is that the company issues its shareholders a set number of new shares for each share they own. In the case of the popular Mexican fast-casual chain, it was 50 shares for each one. So, if you owned 10 shares before the split, you own 500 shares now. That might sound like an incredible deal, but it really isn't. That's because in every split, the stock price gets adjusted proportionally. Chipotle shares began trading on June 26 at about 2% of the price they closed the session prior.

CMG data by YCharts

Each shareholder still owned the same fraction of the company as before. Nothing at all really changed other than that the company now has more shares outstanding and a lower stock price.

Reverse stock splits do the same thing, just in the other direction. After a reverse split, there are fewer shares outstanding and a higher stock price, which is why companies often perform that maneuver when they are at risk of being kicked off a stock exchange because their share price has dropped too low.

But the concept of the reverse split helps to set up the important narrative here. If a company's stock price has dropped to the point where an exchange is threatening to delist it, there are almost always bad things happening with its business. Investors have voted with their feet and dumped the shares, and reverse splits are often followed by more selling.

By contrast, when a company conducts a "normal" split, it's because investor sentiment about it is strong and buying has pushed the stock price up to lofty heights. Those events are often followed by continued strong buying activity because Wall Street views splits as an indicator that the business will continue to perform well. Investor sentiment is a very important driver of stock prices.

Should you buy Chipotle after the stock split?

From a business perspective, Chipotle Mexican Grill today is the exact same company it was before the stock split. The restaurant chain has grown rapidly, and plenty of consumers love its food. Sure, its performance has waxed and waned over time, but management has generally executed well overall.

However, before the 50-for-1 stock split the stock price was hugely expensive. That made it hard for smaller investors to buy. Now, even though each share represents the ownership of a smaller slice of the company, those shares are within reach of more investors. So it is possible that the stock will continue to rise as more investors can add this strongly performing company to their portfolios. In other words, the already strong base of support for the stock could broaden even further.

AAPL data by YCharts

Take a look at the chart of Apple (NASDAQ: AAPL) above and notice all of the "S" flags above the price line. Those are stock splits, and you can see that the stock price just kept going higher and higher after each one. Not in a straight line, of course -- nothing on Wall Street goes up or down in a straight line. But the technology giant's splits did serve as indicators of its strong business performance, and that performance continued after them.

Things don't always work out that well, but it is hard to ignore the importance of investor sentiment when it comes to stock prices. And investors tend to like stock splits.

But don't take continued strong business performance for granted. True, in the first quarter of 2024, for example, sales rose an impressive 14% with same-store sales up a very respectable 7%. So right now it appears that there's no need to worry. But keep an eye on this chain to make sure that it continues to execute at a high level.

Splits are all about investor sentiment

At the end of the day, the only things that have changed about Chipotle after the stock split are that there are more shares outstanding and the stock price is lower. It is still the same company and you should really only buy the stock if you like the business' fundamentals. But assuming you do like the business, the positive view that investors generally have regarding stock splits could be an additional good reason to step into this stock today.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Chipotle Mexican Grill. The Motley Fool has a disclosure policy .