Spinoffs

Often, the parent company 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 spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.

In our experience, and in most academic studies of the subject, this helps the parent and its corporate spinoff. Both generally do better than comparable companies for at least several years after the spinoff takes place.

When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate company, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend, or give its shareholders an opportunity to swap shares of the parent company for the shares of the newly established spinoff.

Study after study has shown that after an initial adjustment period of a few months, stock 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.) The above-average performance of spinoffs makes sense for a couple of reasons.

First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.

Second, spinoffs involve a lot of work and legal fees. Companies only have an incentive to do spinoffs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.

Quite often, a big company will spin off a small subsidiary because it feels the subsidiary is a tiny gem, but that it’s too small to make an impact on the much larger financial statements and market capitalization of the parent.

At TSI Network we’ve had great success with a number of spun off stocks 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.

Needless to say, things don’t always work out this well. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in investing, spinoffs are the closest thing you can find to a sure thing.

See how you can make the most of these special investment opportunities by reading our special free report Spinoff Stock Investigator: All You Need to Know about Reaping the Rewards of Spinoffs.

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Spinoffs Library Archives
KIRKLAND LAKE GOLD $55 is a buy. The stock (Toronto symbol KL; Resources sector; Shares outstanding: 210.2 million; Market cap: $11.6 billion; Dividend yield: 0.6%; Takeover Target Rating: Low; www.cvshealth.com) exposes you to two main mines—the Macassa mine in Northern Ontario and the Fosterville mine in Australia....
KAR AUCTION SERVICES INC. $22 is still a buy for aggressive investors. The company (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 133.4 million; Market cap: $2.9 billion; Dividend yield: 3.5%; Takeover Target Rating: Medium; www.karauctionservices.com) sells used vehicles at 250 physical auction sites in North America and over the Internet....
Investors in Chemours have had a wild ride since the old DuPont—under pressure from activist investor Nelson Peltz—spun off this business in July 2015.


Those new shares initially dropped from around $21 each to $4 by early 2016. They then soared to $57 in October 2017 before falling to the current level.


As with most chemical firms, Chemours’ products are highly cyclical....
Overall, as we’ve said many times before times, we think that spinoffs are the closest thing you can find to a sure thing. The two stocks we look at on the page 1 of this month’s issue, Agilent and Keysight, are great examples of this. Now, we’ve spotted two more stocks for you that look ready to undertake spinoffs....
CVS HEALTH CORP. $73 is okay to hold. Through the stock (New York symbol CVS; Consumer sector; Shares outstanding: 1.3 billion; Market cap: $94.9 billion; Divd. yield: 2.7%; Takeover Target Rating: Low; www.cvshealth.com), you gain exposure to over 9,900 drugstores in the U.S.


CVS’s shares have gained just 2% in the past year....
Shareholders tend to respond favourably to news that an activist investor is now targeting a stock they own. And we think they should. That’s because those activists generally do a good job of spotting opportunities to push a company to unlock hidden value for all its investors.


While not all activists are successful, they’re still worth your attention.


On this page, we analyze three well-established companies that should benefit from the activist pressure now on their management....
Investors in this U.S. gunmaker have seen their shares plummet 70% in the past three years. That’s partly because gun sales tend to increase when owners expect higher regulations, but the pro-gun policies of the Trump administration have dampened those fears.


As well, mass shootings have prompted big retail chains like Walmart to scale back the guns and ammunition they carry in their stores.


In response to those factors, American Outdoor Brands (which changed its name from Smith & Wesson in 2017 to reflect its outdoor products and accessories) plans to spin off its firearms business....
Welcome to your latest issue of Spinoffs & Takeovers! This month, we highlight spinoff opportunities ready to deliver strong returns for your portfolio. They include Keysight, and eBay and Aramark, among several others.


In addition, we provide you with key analysis of stocks now in the crosshairs of activist investors—and with the potential for lucrative spinoffs or takeovers....
It’s been a key part of our message on the value of spinoffs, and we never tire of repeating it for you: According to several academic studies, spinoffs benefit not only the new company but the former parent as well.


A good example is Agilent, a long-time favourite of ours....

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....