Spin-Off Research In the News

The Allure of Corporate Cleavage; Why spinoffs are worth a whirl

Posted by Joe Cornell, CFA on Mon, Mar 05, 2012 @ 14:03 PM
spinoff, joe cornell, spin off, corporate cleavage, spinoffs worth a whirl

Streetwise | Saturday, March 3, 2012

By Michael Santoli

Buying spinoff stocks is a pretty reliable way to exploit a market inefficiency and a formula to outperform the broad market. Recent winners include TripAdvisor and Post Cereal.

It's a bit surprising that focusing on corporate cleavage remains such a lucrative exercise.

The topic here is, of course, spinoffs, in which a company separates one of its businesses by handing it off to shareholders. Academic research dating back decades has documented that buying spinoff stocks is among the more reliable ways to exploit a market inefficiency and a formula to outperform the broad market.

The reasons are that existing shareholders didn't own the parent company for the piece being cast off and sell the new stock. Index funds automatically sell it, Wall Street doesn't immediately cover it and the shares get orphaned for a time, until they are discovered and revalued higher.

Yet, this is all so well understood that one might think it would become a crowded strategy, and that spun off stocks would no longer offer a cheap—never free—lunch.

Not so. There is, perhaps not surprisingly, a small exchange-traded fund devoted to this game, the Guggenheim Spin-Off Fund (ticker: CSD). In its just over five years of life, the fund has slightly outperformed the Standard & Poor's 500. In the past three years through Dec. 31, the fund produced an average gain of more than 27%.

At $36 million in assets and low trading volume, there's no sense storming into it, but as a way to gauge or gingerly play the "spinoff effect," it's useful. The fund tracks the Beacon Spin-Off index, a collection of 40 stocks of spun off companies selected using a fundamental quantitative screen.

Selective and opportunistic shopping for new spinoffs could have done even better than the index. The ETF doesn't incorporate new spinoffs until the shares have been public for at least six months. This means entering a bit late to fully enjoy the "discovery phase" of the new security, particularly with so many edge-seeking players grabbing hold relatively quickly.

Consider a few recent prominent spins. TripAdvisor (TRIP), distributed by Expedia (EXPE), was featured favorably here on Dec. 12 and raced higher by more than 25% into early February before settling back a bit. Ralcorp Holdings (RAH) just cut loose Post Cereal (POST), whose shares are up more than 15% in its few weeks of independence.

One coming spin to watch: Sara Lee (SLE) is due to spin its coffee and tea operations—with nice profit margins, an excellent market position in Europe and an attractive Senseo single-serve-coffee machine line—by midyear. Sara Lee has experience in spins, and though the coffee business will be domiciled and listed in Amsterdam, investors will get a one-time $3-per-share dividend upon completion and the deal will most likely result in the pieces summing to more than the current Sara Lee share price.

Tags: Spinoff, TripAdviosrs, TRIP, POST