Exploring Spin Offs

Exploring Spin offs

Spin off companies appear to be a place where one can consistently beat the S&P 500.  This post will explore this possible investment closer than previous posts.  If you would like to see my perspective on a spin off that occurred recently you can check out the posts I wrote on the Conduent spin off that occurred earlier this year.  Full disclosure, as of this writing I currently have 100 shares of Conduent and five long term options in Conduent and Xerox set to expire in 2019.

Corporate spin off opportunity from Xerox: Conduent

“Carefully study spin offs” – Charlie Munger

Risks

The risks associated with spin offs are numerous, so before a reader immediately goes out and buys every spin off they can find, some words of caution:

  1. A Deloitte study found that 4 out of 10 spin off companies do not generate a positive return in their first 12 months of trading.
  2. The same study found that the bottom quartile returned -39% over the first year.

You can find the Deloitte study by following this link.

Rewards

The return associated with spin offs is apparent in the Bloomberg Spinoff Index which from 2003 to 2016 returned approximately 15.58% while the S&P500 returned 8.88%!

Reasons Spin offs remain a good place to look for deals

  1. In a world of increasing index investing, many spin offs will be beaten down by institutions selling the shares of the new company outright because it will not be in the index.
  2. Institutions may also find that the recent spin off does not meet their investment expectations (like size or leverage amount) and they will again immediately dump the shares without considering the value of the investment.
  3. Sometimes these smaller companies demonstrate a new, previously undiscovered business opportunity.
  4. Investors often are wary (or haven’t heard) of these companies because many of them are not followed by analysts until after a few months of independence.

Conclusion

With a consistent way to outperform the S&P500, this seems to be a place I want to be in the stock market.  Next week HPE will be spinning off a portion of its business, as a current investor in HPE I will be looking at this spin off with great interest.