When iGate did its stock spinoff of Mastech (MHH) it certainly had all the markings of a successful spinoff.  The new entity brought good earnings with it.  The parent’s shareholders hadn’t necessarily bought iGate for the staffing division.  And, it was small enough and unknown enough to be under the radar of most investors and analysts. 

It did have one worrisome characteristic however.  It is in a business that does better when the economy is strong and adding jobs.  When there is lots of unemployment,  staffing companies are expected to not do as well … and that is exactly the economy that Mastech was born into.  Oh yes,  and there was another problem that is spoken to in the blog post referenced below.

The “Logical Stock Market Investing Blog” has shared some excellent information on the Mastech stock spinoff.   It is well worth looking at as it fills in a back story that would not be easy for most of us to find ourselves.

On the other hand, good story or not, it was a stock spin-off and perhaps by taking that as reason enough we might have done very well had we waited some reasonable period of time and then entered on a breakout on a weekly chart.

What’s a “reasonable” waiting period?  It’s best to pick your own.  Just look at a number of charts of spin-offs and see what you think.  Whatever you pick, stick with it long enough to tell how you like it without trying to outguess your system.

Disclosure:  I was aware of the MHH spin-off and did not follow my own advice given above, resulting in leaving some money on the table.  Hopefully the lesson will be worth more over time than what I didn’t make by my  “yes, but . . . .” response.

Tags: Mastech, MHH, spin-off stock, stock spin-off

A stock spin-off definitely can create a value situation, a bargain as it were.  

Why this is likely to occur with a spin-off stock has been described very well in Joel Greenblatt’s book You Can Be A Stock Market Genius: Uncover The Secret Hiding Places Of Stock Market Profits.  It’s a great little book, a fun read, and with its garish yellow cover and outrageous title you can also have an excuse to start conversations with strangers who are staring at you and your book in coffee shops and on subways, if that is your kind of thing.   If you’d just like a quick summation of his main points without the case examples you can also check what I’ve written here.

Secrets

The idea that there are secrets that make success possible and that someone who knows them is (claiming to be?) willing to tell what they are has always fascinated me.  Secrets for the price of a paperback!?!  Wow!  Not very well-kept secrets after the book is published, . . . . or, are they?  Mr. Greenblatt tells us generally where to look and gives us examples of how he has successfully found gems there, but faced with a raw list of companies doing spin-offs the question still is “which one(s)?”  And that, my friends, surely remains a secret.

On the other hand . . . wasn’t the concept of a secret formula whose spoils were available only to the select the very model that Bernie Madoff used to keep his Ponzi scheme running so long?  He wouldn’t tell you the secret.  Heck, apparently if you asked too many questions about it he’d show you the door.  But, he would let you invest with him and he would use the secret to make you lots of money.

OK, so let’s assume that Joel Greenblatt really has given us a gift by showing us that if we are looking for an edge, an increased chance to profit, then what we have to do is look for stocks to buy within certain groups or situations.  We can also assume that unless he is out of his mind, he probably either

• isn’t telling us a secret at all, or
• he isn’t telling us the whole secret, or
• for some reason he’s pretty sure that herds of us won’t use it to ruin his business.

From my experience, the last one is the most likely.  Trading and investing require so much discipline and control of ego issues that most people can’t or won’t do what they have to do to even approach the levels of the really successful practitioners.

Due Diligence: Not Losing What You’ve Got While Trying To Get More

So, how do we get from knowing that there is particular area where there is a higher than average amount of gold to be found, but that you have to pick where you dig carefully because there isn’t gold everywhere there and some places will actually cause you to lose some of what you already have?  What do you do to put the odds in your favor?

I recently had the pleasure of being able to talk with someone who knows a lot about doing one’s due diligence in picking the best situations to enter and the ones to run away from, Len Blum of Westwood Capital.   

I was looking for more secrets.  I admit it.  But, this time the question was what the secrets are to picking the “right” spin-off stock and not getting caught as the sucker in someone else’s good deal (for them that is.)

Knowing that Len has given a lot of thought to how and why so many people got taken in by Madoff and company, I figured that looking at that situation might give us some new ways to look at doing due diligence on stock spin-offs.  Right off he warned me that my father could have told me the core idea of his advice which is “if you aren’t greedy, you can’t be defrauded”  and “if it looks too good to be true, it probably is.”   Actually, I think my father took it a step further to something about if you are greedy you deserve to be defrauded, but that’s neither here nor there.

Anyway . . . . .  the key points are to keeping risk under control that Len told me included

• understanding the business plan.  What does the company do? sell?  How do they do it?  How will the new structures set up in the stock spin-off make them better able to do this?      If you can’t understand it, don’t buy in.  There are lots of deals coming along all the time.  It is the mark of the huckster to try to get you to believe that you have to buy right now or forever lose the chance.  Don’t do the same thing to yourself.       Remember the old pilot’s saying “It is better to be on the ground wishing you were in the air than to be in the air wishing you were on the ground.”  (Not only is the saying old, but more importantly, the pilots who say it are old, which is a very good thing if you are a pilot.)
• looking at who the accountant is.  Who’s putting their name on the dotted line saying that the books add up?  Apparently, in Madoff’s case the accountant was not one of the big seven or big ten or however many” big” accountants there are these days.  Fortunately, in the case of stock spin-offs we have mountains of SEC documentation telling us what is going on.
• assessing the company’s competiveness.  The classic business school SWOT analysis : strengths, weaknesses, opportunities, threats is his “secret” tool for this.   If you’re thinking that this is not a secret, all I can say is that given how carefully most investors work through this process, you’d think it was.
• assessing why (if) this company is essential to its sector.  Where do they fit into the flow of the industry, the secotr, the economy?  Are they an integral and difficult to replace cog in the machine?
• telling what its sustainable competitive advantage is.  Is their product unique?  Are their people smarter?  Do they own all the best locations from which to do business?  What?
• comparing them to the competition.  What do others in their industry think of them?  How do they rank comparatively on the above criteria?

This stuff is very important to you if you enter the decision making process with a bias, such as the assumption that spin-off stocks are going to outperform.  It has been said that the purpose of thinking is to be able to stop thinking.  Working through a checklist of criteria is one way not to stop thinking too soon.

Lessons From The Madoff Rip-off

That all sounds good and doable with spin-off stocks and their parent companies, but what about Madoff?  It was really off topic, but since I was talking with Len Blum, clearly a guy who has probably forgotten more about mergers, acquisitions, and investing in general than most of us ever knew, I had to ask . . . . how did investing with Madoff stack up on these criteria?  Were the tests he’s suggesting robust enough to keep me out of big trouble from a master con artist?  (Let’s face it, not every spin-off is undertaken in ways that benefit the investor. )

The answer was a resounding “absolutely”.  OK, so what were the Madoff red flags?  Lots it turns out, but just a few of the ones he told me were enough to make the point – -

• The returns were spectacular for an investment that never showed a loss, returns clearly too good to be true.
• Madoff used a complex strategy that many investors did not understand – don’t ever buy something you don’t understand!
• Madoff created a mystique.  He would not meet investors directly.  He turned down money (that’s pretty bizarre for a fund manager).
• The accountants were not well known, respected providers.
• There was not a third party holding and accounting for the money.
• Madoff’s fees of four cents a share were too low for a “genius” (if a heart surgeon would operate on you for $10/hour, would you go under his knife?).

What Could They Possibly Have Been Thinking?

 So, why did people go into it?  Especially why did people and institutions put all of their money into it?  To this question Len allowed as how no one knows why other people do what they do for sure, but that is seems that there were three groups

1. people who simply did not know better,
2. people who were capable of  knowing better, but did not analyze the offer carefully enough,
3. people who did know better, were perfectly aware of the red flags,  and went into it anyway.

Groups 1. and 2. I can understand, having done at least my share of dumb things for both of those reasons, . . . . but #3? 

People Who Knew Better

 Whatever the reasons that that third group  (the ones who had to know better)  invested with Madoff, it has to be one of the great cosmic jokes of the decade if not the century that they ended up being the dupes right along with the poor souls who trusted, who wanted to be in the right group, who were too shy to ask questions.

What were those professionals thinking?  If they could be fooled by this, then I certainly can’t expect to be able to avoid this kind of thing,  but there is no doubt in Len Blum’s voice when he says that it was all there for the prudent individual to find.  So what’s going on? 

It baffles me, but it brings to mind one of the basic strategies of cognitive psychotherapy.  Most often if you directly ask someone why they did something stupid or wrong they will tell you either that they don’t know or they will give an answer that doesn’t go anywhere in terms of untangling the mess and making it less likely to happen again.   It can even be posited that at some level they don’t want to know what they are thinking.

So, the therapist can ask “What might a person who in this situation took this action believe?  What might their process have been?” 

What might logically be between the stimulus (in this case the offer to put your money with a guy who is reporting bigger returns than his system would be expected to generate) and the response (buy or stay out) that would explain their choice of what to do.  If you were a knowledgeable professional who believed that being greedy put you at risk of being defrauded, you probably would have stayed out.  If you believed that you might make a lot of money with little chance of being accused of doing something wrong and that this was just the way business is done, or some similar version of assumption or belief, then you might have invested in it.

The recently released tape of Madoff coaching a witness on sidestepping the SEC investigators aired on WBUR radio in Boston recently makes me think that maybe this is a question that someone with more knowledge and experience than I should be asking.   It was chilling to me to hear Madoff tell the person on the other end of the phone call over and over what to say and what not to say to limit the chance that the SEC would accuse them of front running.  He clearly did not want the investigators to even start thinking about that or any other potential violation.  You can hear the whole tape by clicking here.  

So, trying to think like the aforementioned therapist, I asked Len what beliefs or thoughts could have led a professional who was fully capable of smelling a rat to put money with Madoff.  

He responded by saying,  “Some bright investors are dishonest.  What if  using common sense, an investor knows that Madoff’s purported strategy is a sham?  Yet the investor knows that Madoff’s legitimate trading operations trade 10% of the volume on the New York Stock Exchange.  And what if, the investor assumes that Madoff is “front running” – using information about pending securities trades to profit (buy before buy orders are processed and visa versa) – and this is how Madoff is making such extraordinary returns (frankly, besides for a Ponzi scheme, this is the only other logical explanation).  Then, since nobody can prove that the investor suspected front running, the investor invests with Madoff to earn illegal returns without fear of retribution.”

That certainly does fill in that previously mentioned gap between stimulus and response better than anything I came up with.

Tags: due diligence, Madoff, stock spin-off

Spin-off CareFusion has announced that not only will it’s common stock, ticker symbol CFN, start trading on September 1, 2009, but that will also be the day that it joins the S&P 500 Index.  And, the company has given us an almost two week headstart to go over their pro forma financials and projections.  While this may be viewed as a testament to the size and financial strength of the new entity, it is not a pure positive in terms of evaluating the stock spin-off as a potential buy.

One of the commonly mentioned reasons that spin-off stocks create value situations is that the method for distributing the stock is inherently inefficient.  It is given to everyone who owned the parent company on a certain date and it is not uncommon for many of those shareholders to not want to own a piece of the new company irrespective of its inherent value or future prospects.

A spin-off’s stock may not be attractive to the recipients for a number of reasons including that

• they did not choose to invest in this company and likely view it as a hassle to get up to speed on whether they want to hold it or not
• the number of shares distributed is often small relative to the original holding in the parent company, again leading to a “sell it to keep things simple” kind of decision
• the size of the new entity is likely to be small and/or in a different sector from that of the parent, forcing institutions to sell it if it does not fit their criteria for inclusion
• if it is not to be included in a particular index, then funds that consist of or invest soley in components of that index have to sell

In the case of CareFusion several of these reasons for the stock price to decline shortly after it starts trading appear to be missing.  CareFusion is

• in the medical field as is the parent, Cardinal Health
• to be included in the S&P 500
• a big, followed company with generally agreed upon solid prospects.

Other “reasons” for spin-off success are still there:  focus, executive motivation, investor favor for a “pure play”.  So which way will it go?  Another stock spinoff success story, or something else?

Fortunately we have our two old reliable friends, price and volume, to tell us exactly how it is going.

Tags: CareFusion, CFN, spin-off stock, stock spin-off, value

CareFusion’s spin-off from Cardinal Health has gotten a lot of attention and, it does sound like a good story judging from what the San Diego Business Journal  has to say about it.  What does it mean to us?  The fortune tellers are out in force predicting what is going to happen next and it makes excellent theater, but is it good for trading? 

I’d say that the best answer is “Maybe.  Maybe not.  We’ll see.” 

In theory, if you knew enough about a situation and could wait long enough, you could indeed predict what was going to happen and have it work out for you.  For me at least, things work out better when I start from the assumptioin that I don’t know enough and I don’t have the resources to wait long enough.

That’s why a solid trading plan that limits losses, adds on to winning positions, and has criteria for when profits will be taken is vital.  For the umpteenth time:  the “story” provides a reason,  but the sanest entry also requires that the price makes a significant move in the direction that validates the story.

So, while all the conjecture and analysis of available data is entertaining ( and perhaps will even prove to have been exactly right ),  my money is going to be waiting to see the price and volume patterns that my trading plan calls for before I enter.

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

The stock spin-off of the IT staffing and consulting company Mastech, symbol MHH, from i-Gate, symbol IGTE, occurred about ten months ago and so far its chart pattern seems to be true to form for a spin-off. 

The first half of the expected (hoped for?) spin-off stock cycle, the initial drop in price for reasons unrelated to the inherent value of the company, appears to have occurred. 

To this point we have just been observors.  Now we need to have a plan that determines if and under what conditions we will start buying the stock.  We do have a wealth of information in the SEC filings and from looking at the stock’s chart. 

You will have to decide what facts are most relevant to you, but some things that caught my eye were

•  the ownership of 57% of MHH shares by the majority owners of IGTE
•  the top two clients account for over 25% of the total revenue
•  the business is described by management as highly correlated with general economic conditions
•  immigration laws have a great effect on abililty to get staff
•  the stock is traded very thinly
•  most recent earnings will be reported August 6, 2009
•  there are no options available presently

This is an interesting situation to me because of Mastech stock’s low volume that makes it just about impossible for most professionals to buy and of little or no interest by analysts to follow.  If and when it “jumps” onto the screens of the professionals, it could be very rewarding for those who go onboard early.

Tags: iGate, IGTE, Mastech, MHH, spin-off stock, stock spin-off

Tags: Claymore/Beacon ETF, CSD, spin-off stocks, stock spin-off

As Entergy, ETR, moves closer to it stock spin-off of 6 nuclear power plants to form the new corporation to be called Enexus, it appears that whether it seems like a good deal may depend on where you are standing.  The Vermont Times Argus has run an article about the  that discusses what Vermont regulators see as potential problems for them in the deal.

The question they and New York regulators are asking is whether Enexus will have enough capital to keep the promises that were made to them initially on what will happen to the plants when they are no longer operating.   That is a legitimate concern, but from the perspective of potential investors in either or both of the companies involved it is more an ethical than a financial issue, (unless of course you live in Vermont and fear your tax dollars may be involved in making the deal work out.)

From our perspective the questions are

• will this spin-off make the parent Entergy stronger and better able to grow earnings, and
• will the spin-off stock be positioned to do the same?

They are dividing the company with some logic — regulated electricity generation vs. open market generation –  but I don’t know enough about the industry to know whether this is such a great difference that it sets either portion free to achieve more than they would together.  If you have a few minutes for some research, you’ll find everything that is publicly known in the SEC Information Statement about the spin-off. 

It would seem that having a regulated portion of the company grinding out steady, reliable cash flow would provide a foundation for the more volatile non-regulated business to weather the ups and downs of that portion of the energy market, but maybe not if any investors in your company know that you are on the hook for a big, uncertain clean-up down the road.  I do not know.

Fortunately, we don’t have to figure that out.  We just have to remember that spin-offs often (not always) provide a reason for a market beating move in stocks and then watch for a move that confirms it in the particular case. 

And, of course, we have to fight off the urge to be smart and/or prove we can predict the future and  just focus on making money.  The tendency of spin-off stocks and parent company stocks to outperform the market and their sectors is enough to put them on our watchlists.

The stock spinoff of Myriad Pharmaceutical (whose symbol will be MYRX when the shares are distributed)  from Myriad Genetics, MYGN, is official though it doesn’t really happen until June 30, 2009.

The Salt Lake Tribune explained it . . .  mostly.  Apparently the Securities and Exchange Commission approved the spinoff and the registration is in place,  but shareholders will not receive shares of the new company until June 30th.  In the meantime, very thin trading has been reported for the “when issued” version of the shares that are trading under the ticker symbol MYRXV with them closing their first day at $7.    The “V” denotes when issued.  After the June 30 distribution the symbol will simply be MYRX.

A new company in the sense that it will be completely separate from the parent, Myriad Genetics, for the first time,  Myriad Pharmaceuticals will have the advantage of continuation of leadership. 

This is always an important issue in assessing a spinoff.  To put it bluntly, “Do these guys know what they are getting into?  Do they know what they are doing?” 

In the case of Myriad Pharmaceuticals, the decision of  Adrian Hobdon, PhD,** to head the newly independent company seems to be a very positive sign.    Dr. Hobdon has been with Myriad Pharmaceuticals, Inc. , and hence Myriad Genetics, since October 1998.   Before that he was at Glaxo Wellcome where, over a period of 17 years, he ran a number of departments within the drug discovery area.  Dr. Hobden obtained a BA in 1975 from Cambridge University and a Ph.D. from Leicester University in 1978. 

While no one can forsee the future, that this experienced, successful man has decided to stake his personal future on this new stand-alone entity  is a very positive sign.  He must believe that the chances of the new drugs that are in the pipeline turning out to be successful ones are very good.

That aside however,  since the new pharmaceutical company doesn’t have any FDA approved pharmaceuticals to sell right now, it will be interesting to see what Myriad Genetics shareholders do with the stock they receive in the spinoff.  It could be a classic spinoff price situation setting up.

With all the talk lately of who should spinoff what to get toxic business segments off of their balance sheets, it is encouraging to see a plan come along that may actually take advantage of the strengths potentially found in a spinoff.

**Note that in the original version of this post Dr. Hobdon’s biography was incorrect and is corrected here.

Tags: MYGN, Myriad Genetics, Myriad Pharmaceuticals, MYRX, MYRXV, spin-off stock, spin-off stocks, stock spin-off investing

Dr. Pepper Snapple Group reported a loss that was not as bad as analysts had expected and a forecast that was a bit better and and the recent spin-off stock’s share price advanced over 10% today.

The Wall Street Journal reported that investors were encouraged by the numbers in an article on the DPS 4th Quarter 2008 earnings report .

The advance came on volume that was more than double its 30 day average. The price was gap up on the day. The close at $17.86 today is an impressive rise from the low of $11.83 made on March 6, 2009. All positives.

Could this mark the beginning of the spin-off company’s advance?

It is time to look at the entry criteria in your trading plan to make your own decision of if and when to enter DPS, but this one is showing signs of life.

Of course with news above and beyond the fundamentals and/or technicals of any particular company coming out every day, keeping a tight rein on the potential downside is especially important. The advantages that spin-off stocks have displayed in the past don’t lessen the need for that . . . ever, and certainly not right now.

Tags: Add new tag, DPS, Dr. Pepper Snapple, spin-off stock