spinoffs

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”.

Many investors seem to view spinoffs as a nuisance, because they leave you with a tiny holding in a stock you didn’t choose and that you know little about....

We’ve often pointed out that spinoffs are a great way for companies to unlock value. Here are two spinoffs, one old (Agilent) and one new (Motorola Solutions), that we see as buys for long-term gains. MOTOROLA SOLUTIONS INC. $50 (New York symbol MSI; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 325.5 million; Market cap: $16.3 billion; Price-to-sales ratio: 1.9; Dividend yield: 1.8%; TSINetwork Rating: Average; www.motorolasolutions.com) took its current form on January 4, 2011, following the breakup of the old Motorola Inc. The company makes specialized equipment, including bar-code scanners and radios for emergency vehicles. Governments supply 65% of its revenue; the remaining 35% comes from businesses. In 2011, Motorola Solutions earned $888 million, or $2.61 a share. That’s up 42.5% from $623 million, or $1.84 a share, in 2010. These figures exclude several unusual items, mainly costs related to the spinoff from Motorola Inc. Sales rose 7.7%, to $8.2 billion from $7.6 billion....

East Asia Minerals, $1.33, symbol EAS on Toronto (Shares outstanding: 77.5 million; Market cap: $125.7 million; www.eastasiaminerals.com), holds gold and copper exploration properties in Indonesia, and uranium exploration properties in Mongolia. In Indonesia, the company has a 70% to 85% interest in three gold and gold/copper properties in Aceh Province, Sumatra, and Sangihe Island, North Sulawesi. In Mongolia, East Asia Minerals owns seven uranium properties, including the Ingiin-Nars, Ulaan Nuur and Enger uranium projects, as well as two phosphate properties. The company recently handed out shares of Barisan Gold Corp. to its shareholders. It also plans to hand out shares of two more spinoffs, the Sangihe Gold Corp. and East Asia Energy Corp. However, the Indonesian and Mongolian governments must authorize the transfer of these assets before the spinoffs can proceed....

We hardly ever recommend buying new issues when they are first sold to the public, and often stay away from them for months, if not years, afterward. That’s because new issues often come to market when it’s a good time for the company and/or its insiders to sell, but that’s not necessarily a good time for you to buy. Spinoffs are in many ways the opposite of new issues. Companies often do spinoffs when they feel it isn’t a good time to sell. Instead, they choose to hand out shares of the new firm to their shareholders. That often results in buying opportunities in undervalued stocks. (In a just-published issue of Wall Street Stock Forecaster, our newsletter for investing in the U.S. markets, we update our buy/sell/hold advice on a spinoff whose shares have soared 79% for us since September 2010. See below for further details on this potentially undervalued stock’s outlook.)...

We’ve often pointed out that spinoffs like Agilent tend to perform better than comparable stocks in the first few years. Agilent shot up to $162 after it became an independent company in 1999. However, it dropped below $11 when the tech-stock boom ended in 2002. It rose to $40 in 2007, but fell back to $12 in 2009. Even with its erratic history, Agilent still outperformed larger tech stocks, such as Microsoft, Intel, Cisco Systems and its former parent, Hewlett-Packard. Agilent’s recent shift into medical-testing products should give it more predictable earnings, and make the stock less volatile. As well, demand for its electronic-testing products is rising with the economy. AGILENT TECHNOLOGIES INC. $44 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 345.1 million; Market cap: $15.2 billion; Price-to-sales ratio: 2.6; No dividends paid; TSINetwork Rating: Average; www.agilent.com) makes testing systems that help improve electronic products, such as cellphones and computer-networking equipment....

Broadridge began trading on April 2, 2007, after former parent Automatic Data Processing Inc. (ADP) distributed its shares to its own stockholders as a special dividend, or “spinoff.” Like many spinoffs, Broadridge struggled at first. That’s partly because many ADP shareholders quickly sold their new shares. As well, institutional investors often ignore companies with smaller market caps (or the total value of shares outstanding). Broadridge later went into a deep slump over fears of big losses at its securities-clearing division during the 2008 credit crisis. However, as we’ve often pointed out, most spinoffs go on to produce above-average results over a period of years. Broadridge has rebounded strongly, partly because it decided to focus on helping companies communicate with their shareholders, which is less risky than securities clearing. Plus, it is using its improving earnings to buy other related firms and assets that will pay off for years to come....

We hardly ever recommend buying new issues when they are first sold to the public, and often stay away from them for months, if not years, afterward. That’s because new issues often come to market when it’s a good time for the company and/or its insiders to sell, but that’s not necessarily a good time for you to buy. Spinoffs are in many ways the opposite of new issues. Companies often do spinoffs when they feel it isn’t a good time to sell. Instead, they choose to hand out shares of the new firm to their shareholders. That often results in buying opportunities. (In a just-published issue of Wall Street Stock Forecaster, our newsletter for investing in the U.S. markets, we update our buy/sell/hold advice on a spinoff whose shares have risen over 21% since September. See below for further details on this tech stock’s outlook.)...

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:...

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. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away. Today’s tip: “Selling your stock market picks costs money, and that’s why successful investors do it as little as possible.” Investors often ask, “When should I sell my stocks? If I sell now, I’ll nail down big profits. But I’ll have to pay heavy capital gains taxes.”...

We hardly ever recommend buying new issues when they are first sold to the public, and often stay away from them for months, if not years, afterward. That’s because new issues often come to market when it’s a good time for the company and/or its insiders to sell, but that’s not necessarily a good time for you to buy.

Spinoffs are in many ways the antithesis of new issues....