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This Spinoff May Not Spin

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This article is part of our Rising Star Portfolios Series.

I like tracking spinoffs, in part because they're often wrongly considered uninteresting or poor businesses. Such spinoffs often decline in price, and the market commonly misprices such businesses for technical reasons (e.g, forced selling) rather than for fundamental reasons. That's why they're a core area of focus in The Special Situations portfolio, part of our Rising Star Portfolio series. I've already listed a few spinoffs I'm watching here and here, and now recent news has brought Northrop Grumman (NYSE: NOC  ) onto my radar.

Northrop has announced plans to spin off its shipbuilding unit, which would be called Huntington-Ingalls. However, the U.S. Navy has requested that the parent company set up the company with enough financial support to keep the government from footing the bill for pension costs and potential clean-up expenses at one of its shipyards. According to Bloomberg, the Navy is worried that future costs in the new spinoff would boost the prices it pays for ships.

Apparently, the Navy is concerned that the company's shipyard in Avondale, La., which is slated to close in a few years, may need to be an environmental cleanup. And you can be sure that if the service is worried now about such a procedure, it will indeed prove necessary -- it's only a question of the political will to get it done.

Northrop aims to complete the spinoff by the end of the first quarter, and the company and the Navy are already in negotiations now to resolve these issues. A speedy resolution to the negotiations could still let the company keep its schedule.

Join me on my Rising Stars discussion board at The Motley Fool for more spinoffs and special situations.

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. See all of our Rising Star analysts (and their portfolios) here.

Jim Royal, Ph.D., does not own shares in any company mentioned here. 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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10/28/2016 12:04 PM
NOC $228.64 Up +3.29 +1.46%
Northrop Grumman CAPS Rating: ****