Companies that spinoff offer some of the best opportunities that investors can exploit to find outsized returns in the stock market. Don’t take my word for it. Some of the most notable iconic investors like Peter Lynch, Charlie Munger, Joel Greenblatt and Seth Klarman would probably agree.
“For reasons such as these, not to mention the fact that spinoffs frequently go unnoticed by most investors, spinoff shares are likely to initially trade at depressed prices, making them of special interest to value investors. Moreover, unlike most other securities, when shares of a spinoff are being dumped on the market, it is not because the sellers know more than the buyers. In fact, it is fairly clear that they know a lot less.” ~Seth KlarmanOdey Special Situations Fund took on several new positions in March
Odey Asset Management's Special Situations Fund was down 3.2% in March, compared to its benchmark, the MSCI World USD Index, which was up 3.3%. Through the end of March, the fund is up 8.7%, beating the benchmark's return of 4.9%. Q1 2021 hedge fund letters, conferences and more Odey's Special Situations Fund deploys arbitrage and Read More
A spin-off is:
“…the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. A spinoff is a type of divestiture. Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs. For example, a company might spin off one of its mature business units that is experiencing little or no growth so it can focus on a product or service with higher growth prospects. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.” (Source: Investopedia)
For example, Peter Lynch talks favorably about spinoffs in a chapter of his first book “One Up On Wall Street.” Joel Greenblatt dedicated an entire book to spinoffs that he called “You Can Be a Stock Market Genius.”
Spinoff Stats Don’t Lie
Research by sources such as Credit Suisse has found that spinoffs can beat the returns of the Standard & Poor’s 500 stock index by an average of 13 percentage points per year.
We also had a chance to read this fantastic article from StockSpinOffInvesting.com about how many of the “super-investors” invest in spinoffs. One of the main reasons these investors look at spinoffs is because the point of spinning off a company is a point of volatility – one where the market may still take time to assign the right price to the newly formed independent entity. The article quotes investing heavyweights like Seth Klarman and Charlie Munger.
Investing in spinoffs does require patience. A 2014 December CNBC article highlights this reality by citing facts showing that even though the average U.S. spinoff generates a return of 27% relatively soon after listing, 40% of them struggle to achieve positive returns in year one.
For example, Donnelley Financial (DFIN), a spinoff from parent R.R. Donnelly (RRD), performed extremely well, going up more than 12% in its first month as an independent company. The stock had climbed from a spinoff price of $21 to a price of $24. But shares have since retraced to near $21, the original price. You can monitor our ongoing coverage on DFIN HERE as we get closer to the one year mark of the new entity. Remember, you can make money in both the parent company and the company that is spun off.
If you are a special situations investor willing to exercise patience in your investor strategy, you will benefit from GeoInvesting’s diverse blend of special situation research. I’ll be back with a little more on special situations soon!