The concept of seeking value is familiar to anyone who shops for groceries, but when it comes to value investing, carrying those learnings over can be deadly.

The grocery store makes it easy because it’s all right there.  From toilet paper to apples if you want to take the time you can calculate, prod, read, and decide which product has the best value for you.  And anyway, if that new brand that seemed to be such a deal isn’t, you’ll be going back to restock soon anyway.

Now turning to stocks, we want to buy low and sell high.  We want  to find stocks that are likely to go higher than they are now so that we can sell them and make money.   One way to do that is to find a stock that is a bargain, one that has good value.

The thing is, it can be very difficult to tell the difference between true value,  a stock whose price is low by the usual backward looking measures, but is actually priced just right going forward,( in other words one that is down there for good reason), and one that is irrationally, mistakenly, or unfairly undervalued.

Of course it is the latter that we value investors are looking for and spin-off stocks are a great place for find real value;  stocks whose price is depressed for reasons unrelated to the company’s prospects.  In Joel Greenblatt’s language, this is a pond into which we want  to throw our bait in hopes of hooking a big one.

Tags: spin-off stock, stock spin-off, value, value investing

In addition to the common list of reasons why spin-off stocks are likely to be good investments, the fact that they start without obvious sources of overhang.

The term overhang describes blocks of shares that are likely to be sold into a rising trend in the stock’s price, slowing or perhaps even stopping that rise.  In the markets right now you can see overhang in many issues by opening up first a daily 1 year chart and finding one of the many stocks that are up significantly over the past year.  Looks awfully good, doesn’t it?

Switch the chart view either to a 2 or 3 year chart.  Does the one you picked have a huge “mountain” on the left  side from the previous highs?  If it does, that is overhang.  And, what is that “mountain”?  Obviously it is a graphical representation of the path that the price of that stock has traveled over time, but more importantly it is a picture of everyone who bought shares at those prices that were higher than today’s price and are under water.  They are sitting on losses or they are out of the stock nursing their wounds from the losses they have taken.  The painful situation of the owners of those shares is literally hanging over the attempted rally.

At every level of the upward price path there is a new set of investors who are back to break even or are getting near enough to be thinking about getting out of this thing and just making it stop.  And, they are like an ongoing series of speed bumps or mudholes between you and where you want to go.

Spin-off stocks don’t have this.  Even when they head down for a while right out of the gate (and not all do), it is a different situation.  They are free of the reminders of past trades gone bad and once they start their uptrend they are moving into open spaces.

(Unless of course the spin-off was an IPO in which the parent had retained a significant number of shares as was recently the case with Bristol-Myers Squibb’s stock spin-off of Mead Johnson Nutritional which is another whole kettle of fish as discussed here earlier.)

Tags: Bristol-Myers Squibb, Mead Johnson Nutritional, overhang

McDermott International announced in December 2009 that intended to do a stock spin-off of its Babcock & Wilcox Power Generation unit.  Yesterday they said that the spin-off is on track .  

Their financials also showed that the offshore oil & gas services did very well while power generation lagged, so it would appear that casting off the power generation unit promises to a positive for the parent as well as the spin-off stock.

The pacing of this process illustrates what is a real positive in spin-offs for me in that it doesn’t happen fast.  There is time to read the filings and figure out what you want to do.  Being front run by a computer that has made its decision before you can read the title of the press release seems unlikely and with any luck the guys with those fancy computers will go somewhere else.

As for Babcock & Wilcox, this looks like a classic case where they are being given a chance to show what they can do on their own.  Let’s just hope the structure of the stock spinoff gives them a fighting chance to succeed and prosper.  You may want to look at the B & W website to make up your own mind, but these people look to be in the right place at the right time on several fronts to me.

Tags: Babcock & Wilcox, McDermott International, MDR, spin-off stock, stock spin-off

When Bristol-Myers Squibb did the stock spin-off of its Mead Johnson (MJN) nutritional unit I wasn’t too excited about it, because I figured that it didn’t fit the successful spin-off stock model that tends to create a value situation, but I overlooked one place where it did, and that turned out to be an important one.

Generally, the simple stock spin-off in which shares of the new company are distributed to current shareholders of the parent company is the easiest kind for me to understand.  People get shares whether they want them or not.  For various reasons many of them don’t want or can’t keep the shares they receive, so they sell them soon after the spin-off which drives the price down below where it “ought” be by common measures of value.

The IPO route taken by Bristol-Myers Squibb did not hand shares to people who were very likely not to want to keep them.  It sold them to willing buyers.  So, I asked myself where the value creation force is in that.  No one had shares they wanted to unload right away and if you look at MJN’s chart you will see that they didn’t.  But something else was at work.

BMY kept 83% of the total shares of the company.  What this did was limit the public float.

Public float describes the number of shares that you or I or anyone else can go buy on a stock exchange.  The public float does not include shares owned by officers, directors, or others with a very large stake in the company.  In other words people who can’t or are very unlikely to sell them.

Thus, for large scale investors, no matter how good MJN might look to them,  setting up large positions was very difficult or impossible.  They couldn’t get in without distorting the market .

Going back to the reasons I like spin-off stocks notice the one about how the “big guys” often aren’t interested or can’t go there.   When I wrote that I was thinking of a case in which the spin-off company was simply too small for most big investors.

What I hadn’t considered was how this same thing might be accomplished by holding back stock and creating a small public float.  Nor had it occurred to me that when they completed the spin-off by selling the rest of the shares, this would be the selling that pushed the price down as the chart seems to show the October, November, December time span.

So, there it is:  lesson learned, (I think).  Will I be smart enough to see signs that an IPO spin-off has this potential?  To work both the potential for big price movements due to the small float and not get caught flat footed when the rest of the shares are dumped onto the market?  Frankly, I don’t know.  I hope I’ll be smarter about it, but of course these things never look exactly alike.  I do know that I will not reject an IPO spin-off out of hand.  Beyond that, we’ll see.

Tags: BMY, Bristol-Myers Squibb, Mead, MJN

ABII Abraxis Bioscience

If you are wondering what Abraxis Bioscience has up its sleeve with respect to their previously announced stock spin-off, you apparently are going to have to wait until March 11, 2010, before the market opens.  That’s when they have scheduled their conference call to report 4th quarter 2009 results.

Given the comment to an earlier post here and a cursory look at an ABII chart,  it looks like from an investor’s point of view it is time to do something. Whether that’s a stock spin-off or something else is their business.  I just hope they get a bit less stingy with their plans and reasons as it goes forward so we have something to go on.

Tags: stock spin-off

PPD Inc., a contract research organization (CRO),  has filed SEC documents,   Form 10 Registration Statement,  that moves it a step closer to the previously announced stock spin-off of its compound partnering subsidiary, Furiex.

What is a CRO?    PPD Inc. has provided us with a webpage on CRO’s that has a podcast so that you don’t even have to read.

PPDI

Furiex is a wholly owned subsidiary of PPD and the plan is that it will be distributed to shareholders of PPDI as a stock dividend.  When the spin-off is complete, Furiex will be a completely separate, publicly traded company.

Their present timeline calls for the stock spin-off to occur in mid-2010, though they note in their press release announcing the spin-off that a number of things have to happen in the mean time.

A Triangle Business Journal article notes that PPD Inc. employs about 2,000 people in the Raleigh-Durham area of North Carolina.  Hopefully, given the amount of local interest that 2,000 jobs can stir up, we will be getting more information from this source in addition to what is filed with the SEC.

Tags: Form 10, Furiex, PPDI, spin-off stock, stock spin-off

In a terse stock spin-off announcement on January 28, 2010, Abraxis Bioscience (ABII) said that it would be spinning off Abraxis Health some time this year.  It was one of those statements that say everything and nothing, and leave you wondering what’s really going on.  Sort of like saying that the CFO is departing to “spend more time with his family”.

Here’s what they said:

“By spinning off Abraxis Health as an independent, stand-alone company, we believe we will enhance the intrinsic value of both companies by allowing each company to pursue its differing drug development and commercialization strategies,” said Patrick Soon-Shiong, M.D., Executive Chairman of Abraxis BioScience. “We also believe the spin-off will facilitate each company pursuing the most attractive long-term growth opportunities and business strategies, thereby maximizing shareholder value.”

Maximizing shareholder value is always good and we know the part about the separate units being able to pursue their own strategies.  But, is it a good deal for shareholders of the parent, the spin-off stock, or perhaps both?  Unlike the CFO leaving for more time with his family, we will be finding out.  The mandatory information that the company will be filing with the SEC will see to that. -

Now we just have to wait for those SEC filings and set aside the time to read them.   Then we can decide for ourselves whether there is indeed shareholder value in this or not.

Tags: ABII, Abraxis Bioscience, Abraxis Health

Encana spin-off Cenovus, CVE, closed today with its price at the lowest level that it has been since the stock spin-off, 41 days ago by my count.  Where is the “drop-right-after-the-spin-off-and-then head-higher” pattern that we’re looking for when we need it?

The often quoted studies on spin-off investing used stock price two years after the spin-off for their calculations and if my memory serves me correctly they found that most of it came in the second year.  Which brings up a significant psychological factor in making any trading plan work, which is how one sticks to the plan without getting thrown off by activity between getting in and when the plan calls for you to get out.

Where Cenovus will go from here is anyone’s guess.  Spin-off stocks tend to outperform.  Which is a way of saying that on the whole, spin-off stocks go up, but any particular one may or may not.

One thing is for sure and that is that when you don’t stick to your trading plan, whatever it is, you are at risk of getting caught on the wrong side of  the trade coming and going.

What does your trading plan call for here?  Do you get out on the new low?  If so, is it the end of the trade or will you re-enter?  Under what circumstances?  Or, have you decided that your exit will be two years after the spin-off?  Perhaps, you view the spin-off as having a positive bias and you will trade it long.

Whatever you decided when you got in, now is not the time to decide to throw the plan out the window and wing it.

Tags: Cenovus, CVE, spin-off stock, stock spin-off

You have been provided with a list of stock spin-offs to be completed in 2010 courtesy of The Spinoff Report.  If you want to go further than the list and partake of their expertise, you can go to their website and subscribe to their service.  They do a very complete job and if your involvement in this area is big enough to justify their fee, it certainly is something worth looking into.

For the rest of us, whether we can afford the top tier advisory service or not, stock spin-offs remain an excellent corner of the market in which to be looking for positions that meet our personal criteria.  Of course this presupposes that you have personal criteria that must be met before you enter any position, no matter how likely success may be in any particular group of stocks.

You likely will not generate as complete an analysis as TSR does, but that may be counterbalanced by putting in the time yourself.

Tags: stock spin-off

A spinoff stock such as AOL always comes with a story and stories are dangerous if taken for more than they are worth.    For example, this recent Wall Street Journal article brings us a look at some of the “good” and the “bad” stories about the AOL spinoff.  The WSJ is passing on views from some very smart people.

What’s the danger in a story?  Lots as it turns out, especially when they are good ones well thought out and well written.

Stories are dangerous because they feed your desire to “know” what’s going to happen next.  And, thinking that you know what’s going to happen next in trading is like putting on blinders if not a full blindfold.

Someone once argued that the purpose of all thinking is to be able to stop thinking.  ”Ah, now I’ve got it!  Next.”  The big problem is that it is the very nature of our lives that we don’t know what is going to happen next.  Maybe all charts should  be printed with a big blank space over there on the right side where the unknown is lying in wait.

Given the possibilities for AOL in the WSJ article and those from other sources you may find, is AOL a good bet?  It is a spinoff, and that puts the odds in your favor.  It does seem to make sense to get it apart from Time Warner,  another positive.  And, the observation that the ratio of ads on the internet to the number of hours that eyeballs are on webpages is relatively low scores a big positive.  On the other hand, there are negatives too.

So, yes,  AOL does look like a candidate for a watchlist to me.  It is a reasonable place to direct some of your precious attention.  Is it’s stock price going to go up and outpace the market.  No one knows!  No one!

Watch your charts.  Watch price and volume.  When the stock breaks out by whatever criteria you have set in you trading plan,  buy it.  Just let it come to you and stay away from fortune telling.

Tags: AOL, spin-off stock, stock spin-off, trading plan, TWX