Reverse Stock Splits: A Double-Edged Sword for Long-Term Investors?

In the second quarter of 2025, the corporate world witnessed a surge in reverse stock splits, with companies like OceanPal Inc. (NASDAQ: OP), Graphjet Technology (GTI), and Foresight Autonomous Holdings (FRSX) leveraging these moves to align with listing requirements or reposition for growth. While reverse splits are often viewed as a red flag—historically associated with financial distress—their strategic use in 2025 raises a critical question: Can these maneuvers signal undervalued opportunities for long-term investors, or are they merely a desperate attempt to stave off delisting?

The Mechanics and Motivations Behind Reverse Splits

A reverse stock split consolidates shares, reducing the number of outstanding shares while proportionally increasing the share price. For example, OceanPal's 1-for-25 split will shrink its float from 167.4 million to 6.7 million shares, potentially making the stock more attractive to institutional investors. Companies often justify such moves by citing improved marketability, compliance with exchange rules (e.g., Nasdaq's $1 minimum price requirement), or the need to reduce administrative costs.

However, the optics are rarely neutral. A reverse split can trigger investor skepticism, as it often coincides with declining fundamentals. For instance, Greenwave Technology Solutions (GWAV) executed a 1-for-110 split, a drastic consolidation that underscores its struggle to maintain relevance in a competitive sector. Similarly, Quhuo Limited (QH)'s 1-for-90 split reflects a company grappling with liquidity constraints.

Short-Term Reactions vs. Long-Term Potential

Academic research paints a mixed picture. A 30-year study of Brazilian markets (1987–2016) found that reverse splits typically generate negative abnormal returns in the short term, with stock prices declining by 3–4% around the “ex” date. This aligns with broader market behavior: investors often interpret reverse splits as a signal of desperation, leading to sell-offs. For example, LogicMark (LGMK), a biotech firm that executed multiple reverse splits between 2021 and 2024, saw its stock plummet by 99% over the period—a cautionary tale for those chasing speculative bets.

Yet, exceptions exist. Citigroup (C)'s 1-for-10 reverse split in 2011, executed during its post-crisis recovery, was followed by a 10-fold increase in its stock price. The key difference? Citigroup had a clear path to profitability and a strong balance sheet. This suggests that reverse splits can be a tool for strategic restructuring when paired with tangible operational improvements.

Identifying Undervalued Opportunities: A Framework for Investors

For long-term investors, the challenge lies in distinguishing between companies using reverse splits as a lifeline and those leveraging them as part of a broader turnaround strategy. Here's a framework to evaluate such opportunities:

1. Fundamental Analysis:
2. Revenue and EBITDA Trends: Is the company growing its top and bottom lines, or is the split a stopgap measure?
3. Debt Levels: High leverage combined with a reverse split often signals deeper issues.

4. Industry Position: Is the company a market leader with a defensible moat, or a niche player in a declining sector?

5. Strategic Rationale:

6. Compliance vs. Restructuring: A split to meet listing requirements (e.g., Nasdaq's $1 rule) is less concerning than one to avoid delisting.

7. Capital-Raising Plans: Does the company have a clear roadmap for raising capital or improving liquidity post-split?

8. Market Sentiment:

9. Institutional Interest: A reverse split that attracts institutional buyers (e.g., OceanPal's focus on institutional appeal) may indicate renewed confidence.
10. Short-Interest Data: High short interest post-split could signal bearish expectations.

Case Studies: Lessons from 2025

• OceanPal Inc. (OP): The shipping company's 1-for-25 split is framed as a move to enhance marketability. With a focus on dry bulk and product tankers, OceanPal operates in a sector sensitive to global trade cycles. Investors should monitor its ability to secure long-term charters and manage fuel costs.
• General Enterprise Ventures (GEVI): Its 1-for-6 split aims to comply with exchange requirements. However, the company's lack of a clear revenue stream or competitive advantage raises questions about its long-term viability.
• Citigroup (C): A historical example of a reverse split that worked. Post-2011, Citigroup's focus on deleveraging and cost-cutting drove its recovery. Today's investors could draw parallels if a company demonstrates similar discipline.

The Risks of Overlooking Red Flags

While reverse splits can occasionally unlock value, they are often a symptom of deeper problems. A 2025 study by NYU and Emory University found that 75% of companies that executed reverse splits between 1962 and 2001 failed within three years. This underscores the importance of due diligence. For example, Express (EXPRQ)'s reverse split in 2024 was followed by a delisting, eroding shareholder value entirely.

Conclusion: Proceed with Caution, But Stay Open-Minded

Reverse stock splits are not inherently bad, but they require a discerning eye. For long-term investors, the key is to look beyond the split itself and assess the company's fundamentals, strategic clarity, and market dynamics. While most reverse splits lead to underperformance, rare exceptions like Citigroup remind us that value can emerge from restructuring—if the company has the discipline to execute.

In a market where 93 reverse splits occurred in Q1 2025—the highest in over a decade—investors must balance skepticism with curiosity. The next Citigroup may be out there, but it will take rigorous analysis to find it.