Thread by @stockspinoffss

Everything You Need to Know About Spin-offs:

In the following thread, I will explain:
- what spin-offs are
- famous investors who bought spinoffs
- studies analyzing spinoffs
- and how to find spin-offs

// Thread //

A spin-off is when a corporation takes a subsidiary, division, or part of its business and separates it from the parent company.

Leaving a new, independent, free­ standing company listed on the stock market.

Why Spin-offs Outperform 👇

There’s a few structural and behavioral constraints that ensure spin-offs will continue to be profitable hunting grounds for bargain stocks:

Reason #1 - Indiscriminate selling

Because spin-offs tend to be smaller subdivisions of a larger conglomerate, there’s usually selling pressure from institutions and individual investors.

Institutions are often forced to sell: For example, say you’re a large cap value portfolio manager. Your investment mandate will most likely prohibit owning small cap stocks. So you’re basically forced to sell.

Individual investors often just click sell.

They view it as sort of a dividend. They think, “hey I didn’t invest in this so I’m just going to take my gains.”

Even more, there’s often not much or any analyst coverage initially.

But, there’s more.

Reason #2 - Incentives

Historically, once separated from the large conglomerate, entrepreneurial forces are unleashed.

Previously, spin-offs are often a subsidiary of a large corporate conglomerate.

Every decision, maybe it’s capex or marketing spend, has to be approved by two or three layers of management.

After the spin-off, management no longer has to fight for approval or resources.

On top of that, often management receives stock options in the new spin-off that incentive them to improve prospects for the business.

Some spin-off praise from top investors 👇

“You can make a pile of money investing in spin-offs...Stocks of spin-off companies significantly and consistently outperform the market averages.”

- Joel Greenblatt

“Spin-offs often present attractive opportunities for investors”

Seth Klarman

“Carefully study spin-offs.” - Charlie Munger

Now for some studies showing spinoff’s historical outperformance:

Study #1: Restructuring Through Spin-offs: The Stock Market Evidence

Conclusion: During the period of 1965 to 1990, spin-offs outperformed the market by 10% annually for three years of trading.

(PDF)
longrunplan.com/wp-content/upl…

Study #2: Lehman Brothers - Corporate Spin-offs Beat The Market

Conclusion: During the period of 1990 to 2006, Spin-offs outperformed the S&P 500 by 13.3% in the first 12 months of trading.

barrons.com/articles/SB114…

Study #3: Credit Suisse - Do Spin-offs Create or Destroy Value

Conclusion: During the period of 1995 to 2012, Spin-offs outperformed the market by 13.4% in the first 12 months of trading.

(PDF) (first result)
google.com/search?q=credi…

Study #4: The Stock Price Performance of Spin-off Subsidiaries, Their Parents, and the Spin-off ETF

Conclusion: During the period of 2001 to 2013, Spin-offs outperformed the market by 17.1% in the first 22 months of trading.

(PDF)
krannert.purdue.edu/faculty/mcconn…

How to find spinoffs:

1. Set up Google Alert for "spin-off"

google.com/alerts

2. Use our Spinoff Calendar:

stockspinoffinvesting.com/upcoming

3. Use SEC EDGAR

sec.gov/cgi-bin/srch-e…

Enter "form-type = 10-12b" in search bar

Thank you for reading,

Next week I’ll be releasing two threads:

One will cover every spin-off case study (including lessons learned) mentioned in You Can Be a Stock Market Genius

The second will cover lessons from the Graham & Doddsville interview of Kingstown Capital Management

Just one more thing...

Over the last five years, my spinoff recommendations have generated an average return of 24.1%.

Beating the S&P 500 by 8.3%.

My last high conviction investment, Thungela Resources, has returned 155% in a little over two months.

And I’m still holding.

Two weeks ago I released a new high conviction idea:

Some key points:
- Trading at PE of 1x. Peers trade at 2x-5x
- Experiencing indiscriminate selling
- div/buyback (~16% current yield) will force a re-rate

If you would like to get access to that idea, future ideas, our past research, and our monthly live call, click here:
stockspinoffinvesting.com/premium/

(prices will increase by 50% on Oct. 31 due to high demand)