Topic: Value Stocks

Investor Toolkit: How spinoffs can create bargain stocks that soar

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing, including how to spot the best bargain stocks for your portfolio. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “Spinoffs can bring two-way benefits, to the parent and the spun off division.”

In a spinoff, a company sets up part of its operations as a separate public company, then hands shares in this company over to shareholders, or gives them a chance to buy these bargain stocks cheaply. Often, the spun off business and the parent both gain. Here’s why:

  • More 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.
  • 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. For example, in 2004 Motorola Inc. (symbol MOT on New York), one of the stocks we cover in our Wall Street Stock Forecaster newsletter, handed out its remaining stake in its Freescale Semiconductor subsidiary to its shareholders. Freescale began trading at around $17 a share.

    At the time, we saw Freescale shares as bargain stocks, and recommended that investors hold on to them. In 2006, Freescale accepted a $40-a-share all-cash takeover from a private investment group. That gave our readers a 135% gain in less than two years.


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  • Opportunity. 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 is often minimal at first. But after this initial slump, these spun off bargain stocks generally go on to outperform the market as a whole.
  • Recent spinoffs include the deal between Verizon Communications Inc. (symbol VZ on New York) and Frontier Communications (symbol FTR on New York), which sells Internet and traditional phone services. Under the agreement, Verizon spun off some of its traditional telephone operations to Frontier. In return, Verizon shareholders received 0.24 shares of Frontier for each Verizon share they held. Verizon shareholders now own 68% of Frontier. (We cover both Verizon and Frontier in Wall Street Stock Forecaster.)

    The move helps Verizon focus on its more profitable wireless operations. Moreover, the deal tripled Frontier’s size, and many of these new clients are in areas with little high-speed Internet access. That gives Frontier a growth opportunity.

Investment advice: If you get a spinoff as a special dividend, hold on to the spinoff and the company that spun it off to you. Both could be among the best bargain stocks you’ve ever owned.

Next Wednesday, September 15, 2010, Investor Toolkit will look at the hazards of investing using a “black box,” or a computer program that makes investment decisions for you.

You can get our full analysis of dozens of other companies in the fast-changing U.S. market in Wall Street Stock Forecaster. What’s more, you can get the latest issue absolutely free when you subscribe today. Click here to learn how.

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