Topic: Spinoffs

Find spinoff stocks and buy the best of them for superior gains


Learn how to find spinoff stocks and add value to your portfolio with these unique and profitable investments

Top-quality stocks—including spinoffs—tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Meanwhile, when it comes to corporate spinoffs, a number of studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years. For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.

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Find spinoff stocks and boost your long-term portfolio returns

Oddly enough, many investors react to spinoffs they receive as a nuisance, because they leave you with a tiny holding in a stock you didn’t choose and know little about. As a result, these investors may dump any spinoffs they receive as soon as they get around to it. However, we think that they’d be better off to buy more of any spinoff they receive, because spinoffs in general come with the odds set in investors’ favour.

In fact, one group of investors who might be interested in investing in spinoffs are seekers of undervalued stocks—and on the whole, it pays to follow the lead of these value investors. You should also have the patience to hang on through perhaps a period of sluggish trading, while the reluctant spinoff holders mentioned above exercise their urge to sell.

Value investors target spinoff stocks because they unlock hidden value

One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a subsidiary. The parent company can either sell the public stock in the new company (most often through an initial public offering) or spin it off; i.e., hand the stock out to its own investors.

In the past few years, though, it has become common to do both. Sometimes, the parent company first starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spinoff, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.

It bears repeating, that in our experience, and in most academic studies of the subject, both the parent and the new company created by the spinoff benefit: they generally do better than comparable companies for at least several years after the spinoff takes place.

Find spinoff stocks and their parents and buy the best of them for these reasons

  • Spinoffs offer flexibility. Spinning off unwanted assets lets parent-company managers focus on the part of their business they want to retain. Usually they hold on to the part best suited to their talents.
  • Spun off shares often slump when they begin trading. Many investors routinely dump stock they receive in a spinoff. They may only get a handful of shares — perhaps one for each 10 shares they own. They may have little familiarity with the shares, and coverage by brokerage analysts and the press can often be minimal at first. But after this initial slump, these spun-off bargain stocks generally go on to outperform the market as a whole.
  • Spinoffs are born with the proverbial “silver spoon.” Parent companies may devote great effort to ensuring they have adequate finances and strong management. They want the spinoff to succeed, for their own prestige, and because they want spun-off bargain stocks to benefit their shareholders.
  • Spinoffs may facilitate takeovers. Spinoffs often trade at low market capitalizations, which can make them attractive “pure pay” takeover targets.

Profit even more with spinoff investing by using our TSI Takeover Target Ratings

Our TSI Takeover Target Rating considers a range of factors to determine the chances of a spinoff company attracting takeover interest (and these align with our Successful Investor approach):

Here’s a look at some of the key factors that enhance a spinoff’s takeover appeal. We use these factors to calculate our TSI Takeover Target Rating:

  • General profitability, with low debt.
  • Hidden assets such as a strong customer base, real estate, or well-known brand names.
  • The absence of a major shareholder and little regulatory or anti-trust constraints.
  • A total market value that makes the spinoff a manageable purchase for a major competitor.
  • Top-quality, but underperforming, assets. Prospective buyers within an industry look at a spinoff company’s perhaps inexperienced management or the lack of financial resources limiting its growth as an opportunity for a big profit boost.

Those following our Successful Investor approach have had great success with spinoff investing over the years. That’s especially true of the many spinoffs we have recommended that have gone up after they began trading, and have later attracted a takeover bid at a substantial premium over the market price.

If a spinoff underperforms, how long will you continue holding it in your portfolio?

Have you had spinoff stocks in your portfolio? How did they perform for you?


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