Topic: Spinoffs

Look to invest in upcoming stock spinoffs instead of new issues to unlock the most profit potential

Invest in upcoming stock spinoffs over new issues to profit over the long run. That’s because spinoffs tend to perform better over time than their IPO counterparts

As we’ve often written, the odds are skewed against you when you enter the market for certain kinds of investments.

One of these is the new-issues or IPO (Initial Public Offering) market. You can get lucky in the new-issues market, just as you can in the used-car market, or in a lottery. But the odds are against you. We recommend looking for upcoming stock spinoffs over new issues.

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Find upcoming stock spinoffs and profit more than you would with new stock issues

New issues generally only come to market when it’s a good time for insiders or the company to sell. That isn’t necessarily a good time for you to buy. Often, it’s a good time to stay out.

On those out-of-the ordinary occasions that a new issue comes to market when it’s a good time for you to buy, then you probably won’t be able to buy much if any, at least at the new-issue price. That’s because the underwriters know when they have a “hot new issue” in the pipeline—that is, one whose share price is likely to shoot up as soon as public trading begins. In that case, they reserve most of the shares available at the initial new-issue price for their biggest and best clients.

If you’re not in that favoured group, you’ll have to buy in the after-market, after prices have moved up and the favoured buyers are taking profits.

With new issues, the best rule for conservative, risk-averse investors is to wait till they’ve gone through an industry setback, if not a full-blown recession. By then you’ll know if they’ve matured into high-quality stocks, or joined the ranks of played-out speculations.

We look at a lot of new or recent stock issues, and mostly decline to get involved. Every now and then, we do recommend one, but without illusions. Sometimes these recommendations pay off, on occasion spectacularly. But they succeed with less regularity than our recommendations of the well-established, profitable, mainly dividend-paying companies we focus on.

When you bet against human nature, you start out with odds that are at least slightly against you. But human nature can also work in your favour. We’ve often written about upcoming stock spinoffs, which are an example of an investment situation in which human nature is on your side.

From time to time, companies set up one or more of their divisions or subsidiaries as an independent company, then hand out shares in that company to their own shareholders as a special dividend, or “spinoff.” This mainly happens when the company wants to get rid of the division for operational reasons, but recognizes that the shares offer good value. So, rather than sell that business, the company hands shares in the new firm to its owners—shareholders in the company.

You might say a spinoff is the antithesis of a new issue. Companies do spinoffs when they feel it isn’t a good time to sell. This is often a good time for patient investors to buy.

In fact, upcoming stock spinoffs provide opportunities that are as close as you can come to a sure thing in investing. Numerous academic studies show that spun-off stocks, and the companies that spin them off, tend to do better on average than comparable companies not involved in spinoffs. Our past record bears out this pattern. Our spinoff buys and their parent companies tend to be among our best recommendations. The academic research and our own experience led us to launch our Spinoffs, Takeovers and Special Situations newsletter.

You can find lots of exceptions to these tendencies in both upcoming stock spinoffs and new issues, of course. But you should practice eyes-wide-open investing. Before making big investment or consumer purchases, consider human nature and how it can influence the future value of what you’re buying.

Find stock spinoffs from reputable, high-quality companies for the best prospects for gains

High-quality stocks that are attractive enough for us to want to recommend them as buys are always a small minority. Many companies acquire a blue-chip reputation by displaying the qualities that the definition suggests.

We continue to believe that investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.

Use our three-part Successful Investor approach to make more money over time

  1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
  3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become overpriced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

What are some of the reasons behind the success of spinoffs in the long term?


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