More Investing Ideas

     Over the past 40 years or so, I have developed many strategies or "themes". Some have proved profitable, some were losers and many were forgotten. One that has produced proven results and will most likely continue to outperform is investing in Spin-offs. A spin-off is the creation of a whole new company by a large corporation. The new company was a division of the parent company that was determined to be better-off as a stand-alone company. The shares of the new company are usually distributed to the existing shareholders as of a certain date. The share price is determined based on the amount of assets and the valuation of other business in that sector. As soon as the independent new company starts to trade on a stock exchange, the market will determine what the share price will be.Why would a large company decide to spin off one of its divisions? One obvious answer is that an activist shareholder like Carl Icahn takes a large position in the parent company and demands that they unlock shareholder value by spinning-off divisions that are not related to the core business. Another example could be that the spun-off company just was not profitable enough. What often happens is that the newly independent company is freed from the constraints of the larger corporation which allows it to pursue more profitable businesses. One reason that this presents an investing opportunity is because the new shares often drop in price and offer an attractive valuation compared to other companies in the same sector. Just imagine the many large mutual funds that hold shares of the parent company because the parent fit the investment objective of these funds. Now they hold a smaller company that possibly is not in the same sector. Many funds will sell the new shares because this new company does not fit their stated investment objectives. The selling causes the new shares to fall in price temporarily creating a short term buying opportunity. One study done in 2012 compared spun-off companies over 1 billion dollars in size to the performance of the S&P 500 index over a seven year span. The spin-offs almost doubled the performance of the  index. Is this strategy a sure thing? Of course not, there are many spin-offs that won't outperform. Make sure that the new company wasn't saddled with a ton of debt by the parent just to clean-up its balance sheet. A google search of  "corporate spin-offs" will reveal many examples to review. There is also an ETF which just invests in spin-offs, if you want to take a safer more diversified approach.