Knowing when you are going buy a spin-off stock is at the heart of a successful spin-off based trading/investing plan.

The whole idea here is that the nature of the spin-off is that the stock price of the new entity tends to go down immediately after the spin-off for reasons largely unrelated to the inherent value of the company and then, at some point, starts moving up, often outpacing the market and the sector.  If you time your entry so as to get into the trade after the stock starts its upward trend, you stand to make a nice gain.

Too early or too late?  If you are lucky you just end up leaving money on the table.  Get it really wrong and go in without a plan as to how you will decide this one is not working as planned and getting out, and you can suffer a significant loss.

The challenge here is that we come into a spin-off situation with a bias.  We know what we expect stock’s price to do (what we want it to do which is make money for us)  but we too easily forget that even if it follows our expected pattern, it will do it in its own time and manner.  When we think we know what is going to happen next when in fact we don’t, we not only put ourselves in danger, but we miss opportunities.

Take a look at this weekly chart of HSNI, the Home Shopping Network.   “All” you had to do was wait until the second week in December of 2008 and then enter long and hang on,  or more conservatively enter in the first week of May 2009.   In either case, you’d have had to hold through the consolidation that began in January 2009 and went for eight or sixteen weeks depending on how you count.  Not an easy thing to do except perhaps in hindsight.

If you’d like to follow one that is going on right now,  look at a weekly chart of Myriad Pharmaceuticals  MYRX as of mid August2009  and the same  chart at year’s end.  Note carefully how totally unhelpful the right side of  the chart beyond the last bar was on the first chart .  (I prefer chart settings that actually leave the chart area blank to the right in cases like this just to underscore how much it cannot tell us about the time frame we care the most about.)  In any case, it is into this void that we have to leap!   By the time the MYRX chart showed us what the chart of HSNI did it was too late.

It is dealing with this kind of uncertainty, even knowing that in the long run the odds are in your favor, that I think separates the successful from the rest of us in this venture.

Tags: HSNI, MYRX, spin-off stock, stock spin-off