Issue 536 | MODERN TRADER
You can beat the Street. At a time when many professional investors lament that the proliferation of ETFs and widespread use of screening techniques have made it harder to find bargains in the stock market, one simple investing approach continues to outperform: spin-offs.
Spin-offs have long been a fruitful investment area; a number of academic studies show that they historically have generated far better returns than the overall stock market. A spin-off occurs when a corporation issues stock in a subsidiary to its shareholders to create a new public company. A related corporate event is an IPO carve-out, through which a company sells the public a stake in a unit, while retaining the rest of the division. Sometimes, the remainder is later distributed to shareholders.
The Bloomberg US Spin-Off Index has surged 18.9% in the first 7 months of 2017. The S&P 500 Index has increased 11.6% in that same period (see "Beating the benchmark, below). The spin index generated a total return of 182% in the past five years (versus 99% for the S&P 500). The Bloomberg US Spin-Off Index has produced a total return of 867% since its Dec. 31, 2002 inception. The S&P 500 generated a total return of 278.5% over the same time frame.
Why do spin-offs outstrip the market? Spins benefit from greater management focus and accountability as stand-alone public companies versus when they were part of larger enterprises. The rational for spin-offs varies. Some companies wish to get rid of a weak or low-margin division that is detracting attention from the parent. Other companies seek to highlight the attributes of a desirable unit whose full value may not be reflected in the parent’s stock price. There also is pressure on managements from the growing number of activist investors, whose prescription for a lagging stock often is a breakup. Last year, there were 35 total spin-offs, with a total market value of $100 billion (see "2016 Spin-Off form", below).
Joe Cornell is the founder and publisher of Spin-Off research, a Chartered Financial Analyst and author of Spin-Off to Pay-Off (McGraw-Hill.)