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.