One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a corporate subsidiary. The parent company can either sell stock in the new company to the public, or spin it off—hand the stock out to its own investors.
Often, the parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.
In our experience, and in most academic studies of the subject, this helps the parent and its corporate spinoff. Both generally do better than comparable companies for at least several years after the spinoff takes place.
When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate company, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend, or give its shareholders an opportunity to swap shares of the parent company for the shares of the newly established spinoff.
Study after study has shown that after an initial adjustment period of a few months, stock spinoffs tend to outperform groups of comparable stocks for several years. (For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.) The above-average performance of spinoffs makes sense for a couple of reasons.
First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.
Second, spinoffs involve a lot of work and legal fees. Companies only have an incentive to do spinoffs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.
Quite often, a big company will spin off a small subsidiary because it feels the subsidiary is a tiny gem, but that it’s too small to make an impact on the much larger financial statements and market capitalization of the parent.
At TSI Network we’ve had great success with a number of spun off stocks over the years. That’s especially true of the many spinoffs we have recommended that have gone up after they began trading, and have later attracted a takeover bid at a substantial premium over the market price.
Needless to say, things don’t always work out this well. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in investing, spinoffs are the closest thing you can find to a sure thing.
See how you can make the most of these special investment opportunities by reading our special free report Spinoff Stock Investigator: All You Need to Know about Reaping the Rewards of Spinoffs.
GE VERNOVA INC. $343 is a hold. The company (New York symbol GEV; Manufacturing sector; Shares outstanding: 275.7 billion; Market cap: $94.6 billion; No dividend paid; Takeover Target Rating: Medium; www.gevernova.com) makes turbines and related equipment for gas-fired and nuclear power plants, plus equipment for wind farms.
On April 2,… Read More
On May 22, 2019, apparel maker VF Corp. spun off its Lee and Wrangler jeans business as the publicly traded Kontoor Brands. Investors received one share in Kontoor for every seven VF shares they held. So far, the split has produced mixed results. While the… Read More
JOHNSON & JOHNSON $164 is a spinoff buy. The company (New York symbol JNJ; Manufacturing sector; Shares outstanding: 2.4 billion; Market cap: $393.6 billion; Dividend yield: 3.0%; Takeover Target Rating: Medium; www.jnj.com) sold shares of its consumer drug business, Kenvue Inc. (New York symbol KVUE), in… Read More
These two medical industry leaders are facing demands from activists to expand their current cost-cutting plans. While that pressure helps draw investor attention to their high-quality assets, Pfizer is your better choice for long-term gains.
PFIZER INC. $30 is a buy. The company (New York symbol PFE; Manufacturing… Read More
You Can See Our Spinoff Stock Portfolio For November 2024 Here.
Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
1) The management of a parent company will only hand out shares… Read More
CEREBRAS SYSTEMS INC. has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on Nasdaq under the symbol CBRS.
Based in California, the company makes specialized, high-performance computer chips for artificial intelligence and other applications. Unlike industry leader… Read More
DUCKHORN PORTFOLIO INC. $11 is a hold. The company (New York symbol NAPA; Consumer sector; Shares outstanding: 147.2 million; Market cap: $1.6 billion; No dividend paid; Takeover Target Rating: Highest; www.duckhornportfilio.com) is a Napa Valley, California-based winery founded in 1976 by Dan and Margaret Duckhorn. Its brands include Duckhorn… Read More
On October 2, 2023, Aramark spun off its uniform rental business as a separate, publicly traded firm called Vestis. Shareholders received one share of Vestis for every two share of Aramark they held. The remaining firm now focuses on food services operations, which includes operating… Read More
LABORATORY CORPORATION OF AMERICA, or LABCORP, $217 is a buy. The company (New York symbol LH; Manufacturing sector; Shares outstanding: 84.0 million; Market cap: $18.2 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.labcorp.com) provides clinical laboratory services from locations in the U.S., the U.K., Europe and Asia.
On June… Read More
We like the outlook for these two industrial firms as they move to simplify their operations. Still, we can only recommend one as a buy right now.
DUPONT DE NEMOURS INC. $85 is a buy. The company (New York symbol DD; Manufacturing sector; Shares outstanding: 430.0 million; Market… Read More
CRACKER BARREL OLD COUNTRY STORE INC. $48 is a hold. The company (Nasdaq symbol CBRL; Consumer sector; Shares outstanding: 22.2 million; Market cap: $1.1 billion; Dividend yield: 2.1%; Takeover Target Rating: Medium; www.crackerbarrel.com) operates over 650 casual dining restaurants under the Cracker Barrel Old Country Store banner, in 44… Read More
In March 2021, golf equipment maker Callaway Golf and driving range operator Topgolf merged in an all-stock transaction valued at $2.6 billion. Topgolf shareholders received 90 million Callaway shares. In 2022, the company was renamed Topgolf Callaway Brands. It also changed its stock-exchange symbol from… Read More
In July 2016, Danaher Corp. (New York symbol DHR) combined its Test & Measurement business with its Industrial Technologies operations to create Fortive. It then spun off the firm, and investors received one Fortive share for every two Danaher shares they held.
In October 2020, Fortive… Read More
You Can See Our Spinoff Stock Portfolio For October 2024 Here.
Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
1) The management of a parent company will only hand out shares… Read More
NEWSMAX INC. has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on New York under the symbol NMAX.
Based in Florida, the company operates a conservative-focused cable TV news channel, as well as online portals. Broadcasting supplies… Read More
NORDSTROM INC. $22.56 is a hold. The retailer (New York symbol JWN; Consumer sector; Shares outstanding: 164.2 million; Market cap: $3.7 billion; Dividend yield: 3.4%; Takeover Target Rating: Highest; www.nordstrom.com) owns and operates over 370 stores in the U.S. and Canada. Those locations sell upscale clothing and footwear.
The Nordstrom… Read More
On November 1, 2015, the old Hewlett-Packard Co. split into two firms—HP Inc. and Hewlett-Packard Enterprise. For every share they held in the old HP, shareholders received one share in each of the new companies.
HP is now up over 150% since the split, while HP… Read More
KENVUE INC. $23 is a hold. The company (New York symbol KVUE; Consumer sector; Shares outstanding: 1.9 billion; Market cap: $43.7 billion; Dividend yield: 3.6%; Takeover Target Rating: Medium; www.kenvue.com) makes a variety of over-the-counter drugs and health products, including Tylenol, Band-Aid and Listerine.
In May 2023, medical products giant… Read More
These three medical products makers (including Kenvue, see box) have struggled as independent firms. While all three have solid prospects, embecta is the only one we see as a buy right now.
EMBECTA CORP. $16 is a spinoff buy. The company (Nasdaq symbol EMBC; Manufacturing & Industry sector;… Read More
FORWARD AIR CORP. $36 is a hold. The Tennessee-based company (Nasdaq symbol FWRD; Manufacturing & Industry sector; Shares outstanding: 27.7 million; Market cap: $997.2 million; Dividend yield: 2.7%; Takeover Target Rating: Medium; www.forwardair.com) provides expedited air and ground freight transportation services.
The stock is now down about 50% since January… Read More
