Why Consider Stock Spinoffs
Keeping an eye on stock spin-offs can be a great way for a value investing person to populate a focused watch list. I like stock spin-offs because, among other things:
- as a group they have consistently outperformed the market
- the best ones outperform the market by a lot
- there are few enough of them that there is a realistic number of situations to follow
- there are enough of them that something is happening most of the time
- they are usually not attractive to the “big guys”
- they often become undervalued early in their existence making them good value investments
- there is lot of good information that is easily available
- there is so much information that most people are unlikely to read through it all and do the necessary figuring to see where the value is
- it is often a free enterprise “work hard, innovate, get ahead” theme playing out which raises the value of the company over time
Long term retrospective studies have shown this group of stocks to outperform the market and their peers significantly in their first three years after the spin off, with the greatest price appreciation occurring in the second year after the spin off. Within that first three years some concerns about proper timing have also been mentioned and of course some of them continue to grow well beyond three years while other peak and decline in that time. It seems that early in their existence these companies are likely to be undervalued by the market. A number of reasons for this undervaluation have been put forward. Most of them appear to have little or nothing to do with the company’s ability to succeed, though they logically can affect its stock price. A lower share price for reasons other than the ability of the company to make money is undervalue. Find that situation and simply wait for a return fair value or overvalue and we have a winner, but is that all there is to it? In the case of stock spin offs, probably not. There is something very positive about management whose work has been buried inside a big company (the rest of which may or may not be closely tied to what they do) finding themselves on their own. Giving management a chance to shine, and to make a lot of money by doing so, is a very strong incentive. This was beautifully stated in the recent Ticketmaster SEC registration statement S-1/A dtd 8-8-08 by the parent , IAC – - “IAC believes that following the spin-offs, Ticketmaster’s performance will have a greater correlation to the Ticketmaster stock price than it did to IAC’s stock price in the current conglomerated structure, thus making stock options a more targeted equity incentive tool for Ticketmaster than it would have been as part of IAC.” And, if giving the executives more stock is a good incentive for them to do better, then it must be a good place for us to own that same stock. If they win, we win. So there’s the formula – - start out undervalued and overperform! That’s what the best stock spin-offs do. Simple enough. Let’s find some of these and buy them. In fact, simple is not always easy, and stock spin-offs are a case in point. Because these situations can occur with an incredibly wide variety of details that are all spelled out in what often seems like a jungle of papers, it can be a daunting task to dig out the important facts that make some much more attractive than others. This makes the challenge of figuring out which members of this outperforming group are most likely to outperform the group all the more interesting and rewarding. It also a lot of work. If it is a kind of sleuthing that you find challenging, great! This is the place for you, because most people are not going to do it. Finally! Here is an edge for the plodders, the crossword puzzle solvers, and the mystery readers. Where’s the money? Where are the traps? What are the clues? What is everybody else likely to be thinking? This blog is aimed at making some of that work easier by reporting news of upcoming stock spin-offs, following the news as it unfolds, and considering the specifics of particular spinoffs that may make them more or less attractive as well as discussing some possible strategies for deciding when to enter and exit these situations. For an engaging and informative introduction to special situation investing it is hard to beat, the book You Can Be A Stock Market Genius by Joel Greenblatt. The book has been reviewed nicely by Jae Jun at Old School Value.com and that is worth a read.
But, again, be careful. Simple is not always easy. This author has packed an incredible amount of information in that modest looking paperback with the garish yellow cover. He writes so well that it is too easy to read along thinking ‘oh, OK’, ‘sure’, and come out the other end having missed how the magician did it, (even though he told us at every step).