Herb Greenberg | On the Street - Finding Treasure in Corporate America's Trash
Oct 10, 2023
As I learned early in my career, spin-offs can be a source of great investment ideas.
This year, there have been quite a few to choose from – with 40 involving spins of companies with market caps greater than $1 billion expected by year end. That's a bit more than usual.
This pruning process goes on continuously, of course, as corporations for whatever reason use spin-offs as a form of housecleaning.
And as with anything tossed to the curb, you can find treasures within the trash.
But that's the tricky part... There's always quite a bit of trash being dressed up to look like treasure.
An analysis in 2019 by market research Boyar Research showed that over the prior decade, spin-offs underperformed the S&P 500 Index by around 2.7%. However, those that did well outperformed the index by an average by around 11%.
With spin-offs, investors in the parent company get shares in the spun-off firm as part of the deal.
They often wind up dumping those shares for the cash, which is where the fun starts...
The spin-off process is a fundamentally inefficient method of distributing stock to the wrong people... You receive shares whether you want them or not.