Spinoff Stocks Worth Watching

This article is part of our Rising Star Portfolios series.

The field of special situations can be a happy hunting ground. As Joel Greenblatt details in his book You Can Be a Stock Market Genius, special-situation investing led him to 50% annualized returns for a decade. That type of return transforms a $1 investment into $52 in just 10 years.

Such special situations are created by transactions that transform the business -- spinoffs, reorganizations, and recapitalizations, to name a few. But the value created by such transactions often isn't reflected in financial statements, and so agile investors can get a jump, and a good price, on these stocks before they appreciate to full value. Also, these situations can be complicated, but it's this transactional complexity that often creates value.

Three spinoffs
Below are some recent or pending spinoffs that could be attractive investment candidates:

Parent

Spinoff

Date

Cablevision (NYSE: CVC  )

Rainbow unit

Mid-2011

Sun Healthcare (Nasdaq: SUNH  )

Sabra Health Care REIT (Nasdaq: SBRA  )

Complete

Northrop Grumman (NYSE: NOC  )

Shipyard unit

Unclear

Cablevision recently announced that it is considering a spinoff of its Rainbow unit, which houses cable channels such as Sundance, IFC, and AMC and generated about 16% of the total company's sales. The split is supposed to allow the company to focus on its core cable operations. Cablevision's move contrasts those of others in the cable space, such as Comcast, which is increasingly moving deeper into the content business. Earlier this year, Cablevision spun off Madison Square Garden (NYSE: MSG  ) .

Sun Healthcare officially completed its spinoff of Sabra, and now the spinoff's shares are trading in the regular way. Sabra expects to attain REIT status shortly, and its portfolio of properties at this point consists exclusively of its former parent's health-care buildings. Sabra intends to expand its portfolio, according to CEO Richard Matros, and is looking at properties in the $10 million to $30 million range.

Northrop, the U.S. Navy's largest shipbuilder, recently suggested it might want out of the shipbuilding game. The company has filed the regulatory paperwork to begin the process of spinning off the company after receiving unsatisfactory bids for the unit. This deal seems to be in limbo at the moment.

I'll be tracking these transactions as part of my portfolio. Are there other special situations that look interesting to you? Let me know in the comments box below.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Jim Royal, Ph.D., does not own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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