Harking back to Gerald Loeb’s admonition that you need a reason and a move before entering a position, yes, stock spin-offs do provide a reason, but the move has to present itself.

Remember that 80% of stocks move along with the overall market. If you are going to enter a situation in which you know that 4 out of 5 stocks are going to follow the trend down, you’d better let the price and volume to come to you.

You can decide when that move is happening in a number of ways and the one you choose is up to you. There are several ways to go, ideally you can find one that makes sense to you and that is clear enough that you can do use it consistently.

John Bean Technology (JBT) from FMC Technology (FTI)

Home Shopping Network (HSNI) from IAC

TREE.com (TREE) from IAC

International Leisure Group (ILGI) from IAC

Ticketmaster (TKTM) from IAC

Patriot Coal (PCX) from Peabody Energy (BTU)

Time Warner Cable (TWC) from Time Warner (TWX)

Dr. Pepper Snapple (DPS) from Cadbury

Brinks Home Security Holdings (CFL) from The Brinks Company (BCO)

Canadian oil sands unit, Cenovus from Encana (ECA.to),  {early 2009)

The is no lack of coverage or awareness of this or most other stock spin-offs now.  Perhaps there was a time when spin-off stocks traveled under most investors’ radars, but that advantage for savvy value seekers has been diluted by websites, blogs, and even highly touted, heavily sold “all-you-to-do-to-beat-the-market” e-books and courses.

The ITT spinoff even has its own website to explain exactly what is going to happen,  http://www.transformationitt.com .  “Three Strong Businesses Positioned to Create Significant Value for Shareholders as Standalone Companies” is apparently their motto.  The pro forma revenues are reported at $3.6 billion from water, $5.8 billion from defense, and $2.1 billion from ITT which they describe as “a diversified global manufacturer of highly engineered industrial products.”  So you and everyone else has more than enough data to get totally bored or confused.

So what’s an individual investor to do?  Other than give up the whole thing, of course.

First off, you can just read the information, draw your own conclusions and make your best estimates of the potential for the parts of the transaction, parent stock and spin-off stock.  That can work quite well actually.  Do you think defense spending will be cut?  Do you think that the world demand for clean water will be a profitable area in the future?  No one has a chart with data on the right hand side that goes beyond today’s date.  Take a deep breath and make your own predictions.  They’re likely to be as good as anyone elses.

As far as I can tell at this point, this spin-off does show signs of being a situation in which the sum of the parts could turn out to be worth more than the whole.

• Though the underlying theme is engineered solutions to complex challenges, each is working in an identifiably different area of application.
• All three entities are in the business of keeping an increasingly efficient flow of limited natural resources flowing to the world’s economies.
• It doesn’t look like the spin-offs are an attempt to dump toxic assets.
• Top executives from the current ITT are going with the new companies.

On the other hand, none of them seems as though it is going to be so different from the current parent company that they will necessarily be automatically dumped by current shareholders creating value that way and they haven’t told us how debt will be apportioned among the three companies.  So, watching, reading, and trying to put it all together is going to be necessary.

Another way to go is to pick some measurable characteristic(s) of the companies’ operations that make sense to you for which you have access to accurate information.

This can take a bit of digging,  but if you find something that others may not be taking into account, it can be well worth the effort.

Ratios can be helpful in this regard because they allow you to compare the data across several companies.  The challenge here is to make an accurate decision about what companies  to compare each component to.   It’s fairly easy to find them for the current configuration in free content on the internet.   For the current ITT  the Morningstar website lists the price/book ratio to be 2.6,  price/sales 1.0, forward Price/Earnings 12.7, and Price/Cash Flow 12.8.  And often, others will even do some calculations for each component of the spin-off for you, especially for the high visibility spin-offs like this one.

Take advantage of those.

As with most stock spin-offs, there is plenty of time to watch the process unfold and decide if, when, and where to enter.  Make the trade come to you.

The Sun Healthcare company announcement spells out step by step how it will occur.  I found the description rather confusing and did better when I could see  it out graphically in their May 27, 2010 SEC filing.

My best take on what is going to happen is that, first,  current Sun Healthcare shareholders will receive all of the the shares of the wholly owned subsidiary, SHG Inc. that apparently owns the operating assets., and then what’s left of SunHealthcare after that will be merged merged into its wholly owned subsidiary Sabra Healthcare REIT, Inc., which owns the operating assets.

When it is all done if you are a shareholder in the current Sun Healthcare, instead of owning one stock in a company with two subsidiaries, you will own the operating assets portion of the current company which will be called the Sun Healthcare Group (SUNH) and you will also own Sabra REIT (SBRA) which will own the real estate assets portion of the current company as two separate stocks.

Right now, Sun Healthcare does not pay a dividend.   The company has stated that Sabra intends to elect REIT status in January 2011,  so presumably that will change.

If the company is correct that the market is not recognizing their true value because it is essentially an REIT and a healthcare services provider all rolled into one, then this should result in the total market value of the two parts increasing.  Are they correct?  Eventually that question will be answered on your quote screen.

Disclosure:  I do not own shares in SUNH.  I have no financial relationship with the company.

The company describes itself as follows:

About Sun Healthcare Group, Inc.

Sun Healthcare Group, Inc.’s (NASDAQ: SUNH) subsidiaries provide nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Sun’s core business is providing, through its subsidiaries, inpatient services, primarily through 166 skilled nursing centers, 16 combined skilled nursing, assisted and independent living centers, 10 assisted living centers, two independent living centers and eight mental health centers. On a consolidated basis, Sun has annual revenues of $1.9 billion and approximately 30,000 employees in 46 states. At Oct. 1, 2010, SunBridge centers had 23,189 licensed beds located in 25 states, of which 22,407 were available for occupancy. Sun also provides rehabilitation therapy services to affiliated and non-affiliated centers through its SunDance subsidiary, medical staffing services through its CareerStaff Unlimited subsidiary and hospice services through its SolAmor subsidiary.

The most recent post  is on Vishay Precision Group, VPG.  They gave it an overall B+, but more importantly they spelled out their reasons commenting on four areas–

1. Do institutions want to own the spin-off?
2. Do insiders want to own the spin-off?
3. Does management have incentives to make the spin-off succeed?
4. Does the spin-off transaction expose a “special opportunity”?

I don’t know how often they will be coming out with posts on spin-off stocks, but this is definitely a resource to be included in your tools.

It looks to me like he’s done a heck of a job with the VSH – VPG reading.  I hope he does more.

I still don’t know how to figure the Zandman component of this whole deal.  Take a look at the comments on the previous post about this one.   Unless I am reading things wrong, these companies belong to the Zandmans and the rest of us have to decide whether to attach ourselves to their coat tails or not.  Does anyone have anything to add, either about that view or about the people involved?

Splits:none                                                                                        chart from Yahoo Finance

Clearwater hasn’t done too badly for its shareholders in the nearly year and a half on its own, has it?  Showing an almost classic spin-off stock chart picture, the price dipped immediately after the spin-off, cosnsolidated and moved higher, only to make one more nerve jangling trip to the down side before started a potentially very rewarding trip upward for those who were on board.

So, why might someone not have taken advantage of this “secret” situation that was right out there in plain sight?  There were lots of “good” reasons for not taking action and clearly they weren’t good enough.

OK, Fall 2008 wasn’t a great time to be thinking about getting into a new long position . . . or was it?  Not many people were, but when was the last time that very many people were making very much money?  And, even if you had had the nerve to put on even a small trade, how would you have dealt with that second dip?  Would you have re-entered on the next move up?

The central point here has to be that the times during which it is hardest to get into a good trade are exactly the times when you have to have the mental discipline to shut out all the crowd noise, decide what your system calls for you to do, and do it!   By the time everyone knows it’s a good idea, it is too late.

Finding potentially rewarding situations is not the biggest challenge.  Setting aside all the internal barriers to making those trades is the big challenge. 

And that, my friends, is the real frontier here.  But that’s no secret either.  What apparently is a secret is what you have to do today, tomorrow, and the next day to build that self-knowledge, self-management, self-discipline when it’s clear you need more.

No one knows what the ETR board will decide to do next of course, but at some point managers as well as investors need to say . . . “Next!”  .  .  . and move on.

Stock spin-offs can make grand theater as this attempt illustrates, but entertainment should be,  at best,  a very very minor reason that you put attention on any stock or group of stocks.

An obvious part of trading discipline is keeping your attention focussed on what you are doing, but deciding when it is time to direct your attention elsewhere and doing that quickly and completely is just as important . . . and much harder for most people to master.

Simon Property Group Weekly Chart

If that were to turn out to be the case,  the SEC documents about both the parent and potential spin-off should be an interesting read.

BUSINESS SUMMARY

Simon Property Group, Inc. is a real estate investment trust. The firm engages in investment, ownership, and management of properties. It invests in the real estate markets across the globe. The firm’s portfolio includes regional malls, premium outlet centers, the mills, community / lifestyle centers, and international properties. Simon Property Group was founded in 1960 and is based in Indianapolis, Indiana.

from Yahoo Finance

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.)