We hardly ever recommend buying new issues when they are first sold to the public, and often stay away from them for months, if not years, afterward. That’s because new issues often come to market when it’s a good time for the company and/or its insiders to sell, but that’s not necessarily a good time for you to buy.

Spinoffs are in many ways the antithesis of new issues. Companies often do spinoffs when they feel it isn’t a good time to sell. Instead, they choose to hand out shares of the new firm to their shareholders. That often results in undervalued stocks — and buying opportunities.

(See below for our analysis of a spinoff in the U.S. technology sector. This potential undervalued stock’s seen its share price climb recently.)

How spinoffs reward patient investors looking for undervalued stocks

When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant, stockholders who have limited expectations for it, and who are willing to sell when they get around to it. Moreover, there is often little, if any, brokerage research available on the new company.

The only investors who might be willing to buy a new spinoff are seekers of undervalued stocks who have taken the trouble to read the voluminous material that companies hand out as part of the spinoff process. But on the whole, it pays to follow the lead of these value seekers, and to hang on through months of sluggish trading while reluctant spinoff holders exercise their urge to sell.

Teradata: A spinoff with wind in its sails

In the current issue of Wall Street Stock Forecaster, we update our buy/sell/hold advice on a company that followed the typical spinoff pattern, computer hardware and software maker Teradata Corp. (symbol TDC on New York). This potential undervalued stock’s share price has been on the rise recently.

Teradata makes computers and software that capture and store large amounts of a business’s data, including its sales and inventory. Teradata then analyzes this information and identifies buying habits and trends.

The company was a wholly owned subsidiary of NCR Corp. until October 1, 2007. That’s when NCR handed out Teradata’s shares to its own shareholders as a special dividend.

Like most spinoffs, Teradata stagnated initially. It didn’t benefit from the profile-building efforts that typically go into new issues. In addition, many NCR shareholders had little interest in Teradata, since they got it as a dividend, rather than as an investment they chose.

Diverse operations, strong balance sheet help Teradata weather the recession

The company’s earnings rose 25% in 2008 from 2007. Lately, the recession has weighed on sales of new systems and software, but revenue from maintenance, training and other services has helped offset this decline. The company has also been doing a good job of cutting costs in response to the slower sales.

Teradata also has a strong balance sheet and a large cash reserve. That gives it plenty of room to buy other firms or expand geographically. Moreover, demand for the company’s products and services should improve with the economy. It will also continue to benefit from falling computer-hardware costs.