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