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This Hated Spinoff’s Nice Bounce is Poised to Continue by TMFDeeJ aka Jason Knapp
Spinoffs are the bread and butter of special situation investors. I pride myself at having looked at nearly every single spinoff that has or is about to happen U.S. and sometimes abroad. While I don’t always invest in them at the time, the knowledge that one gains from researching these special situations often comes in handy down the road.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
That’s exactly what happened as I was doing my daily scan of the companies with the largest selloffs earlier this month. A company that I was somewhat familiar with, Engility Holdings $EGL, a former defense sector spinoff from L-3 Communications $LLL, popped up on the list, getting hammered on an earnings report that Mr. Market clearly didn’t like. Peak to trough, Engility’s stock dropped nearly 22% in a little over two weeks.
Even better, not for long-time shareholders of course, but for someone like myself who was considering buying in, $EGL was down over 40% over the past three months. Now that’s a stock that’s at least due for a nice bounce in a bull market. So I picked up a position in it. How has it done so far? Through yesterday, it has outperformed the S&P 500 +24.03% to +1.72%. Not too shabby for ten days. Annualize that :).
The question is whether I should hold onto the position or not? Is Engility’s outperformance poised to continue? I believe that it is. The company has been winning new business:
Engility Awarded $10.5 Million Contract to Support U.S. Army’s Logistics Modernization Program (LMP)
Engility wins position on $960 million USAF NETCENTS-2 IDIQ contract
Engility Wins $24 Million Contract to Provide Technical Assistance to USAID/Senegal Agricultural Program
And it has had a number of insider purchases lately. As the old adage goes, insiders sell for many reasons, but only buy for one [they are bullish on the company’s prospects]
Even better, in February Engility purchased another company in what many view to be a transformative transaction.
Engility Completes Acquisition of TASC
Transformational Combination Expands Presence into Key Markets, Significantly Increases Cash Flow and Creates a Top-Tier Government Services Company
The TASC purchase diversifies the Engility’s business away from the more volatile defense market and into sectors including intelligence analysis, space systems, cybersecurity, surveillance and reconnaissance operations, secure cloud computing and more. Furthermore, Engility believes that the merger will provide it with significant opportunities for cost savings, enhanced cash flow and increased profitability.