Why This Spring Will Be an Investor's Dream

Spinoffs, recapitalizations, bankruptcies, carve-outs, rights offerings -- terms like these may be complex and intimidating to most investors, but they make special-situation investors feel right at home. These investors know that situations, not companies, will most likely offer them the most favorable odds of success.

With a tidal wave of these opportunities looming, this spring promises to be a special-situation investor's dream. The last six months offered little excitement; sure, General Motors (NYSE: GM  ) came out of bankruptcy, and Sun Healthcare (Nasdaq: SUNHD  ) spun off the interesting-looking Sabra Healthcare REIT (Nasdaq: SBRA  ) , but not much else happened. But this spring, spinoffs alone will keep special-situations investors busy.

At least eight companies have already announced upcoming spinoffs, which is exciting for two reasons:

1. Shareholder-friendly motives usually drive spinoffs
Management may decide to spin off part of its business for a number of reasons. They can return value to shareholders from a business that it would be difficult to sell outright, or separate unrelated businesses to let more focused management teams run each individually. Spinoffs can help the market better understand different pieces of a business, or better appreciate their value. They can also be used to solve legal or regulatory problems, clearing the path for a brighter future for the company.

Shareholder-friendly motives drive all these reasons. Therefore, right off the bat, spinoffs suggest that you're most likely dealing with a shareholder-aligned management team. That's a good start.

2. Investors sell spinoffs indiscriminately
After a spinoff, existing shareholders tend to simply sell their shares of the newly spun-off company, preferring to remain focused on the parent company in which they initially invested. The selling is even more irrational among institutional investors, who are often confined to owning stocks in an index such as the S&P 500 or the Russell 2000. Spinoffs are often small and unlikely to be included in indices, so fund managers are forced to sell their new shares with no concern for valuation or business prospects. This wave of indiscriminate selling can make the spun-off company's stock irrationally cheap -- a great opportunity for savvy investors.

Those two reasons, in a nutshell, should have special-situation investors dancing in the streets as a slew of upcoming spinoffs get rolling. Here's a look ahead at just of a few of those potential opportunities.

ITT: Time to break up
ITT
(NYSE: ITT  ) stands for "International Telephone & Telegraph," which has nothing to do with this massive part-defense contractor, part-water equipment business's current enterprise. After more than 90 years of operation, ITT recently announced that it would use spinoffs to break the company into three stand-alone pieces. Each individual chunk could be prime for indiscriminate selling. As soon as we get more financial details on the splits, special-situation investors can prepare for the transaction day.

Mosaic: Shedding the potash
Cargill, one of the largest private companies in the world, has announced plans to spin off its 64% stake in potash fertilizer behemoth Mosaic (NYSE: MOS  ) . This should be a unique spinoff to watch, because the shares are being distributed to Cargill stakeholders -- that is, its private shareholders and debtholders. Investors in a private company like Cargill obviously aren't restricted to investing within certain stock indices, so it will be interesting to see what they do with their new shares. Combine that nuance with Mosaic's presence as a fertilizer company in a time of rising food prices, and this situation could turn out to be quite an opportunity for investors.

Marathon Oil: Highly refined
Oil and gas company Marathon Oil (NYSE: MRO  ) is spinning off its downstream business this coming June. The resulting company, to be called Marathon Petroleum Corporation, will be the fifth-largest U.S. refiner. The transaction will allow each company to focus on its own strategy, and increase transparency to investors -- classic shareholder-friendly motives. In this situation, both parent and spinoff, which will be operating complementary businesses, will be worthy of investigation.

Fortune Brands: Goodbye, "General Eclectic"
Fortune Brands
(NYSE: FO  ) is separating its three consumer business, creating stand-alone companies focused respectively on distilled spirits, home and security, and golf products. Special-situations investors will particularly want to know how Fortune plans to distribute its debt. The current $9 billion-market-cap company has more than $4 billion in debt. If the company decides to saddle one spinoff with an outsized portion of that debt, as many spinoffs do, we could see an exaggerated sell-off as new shareholders flee the stock.

The special situation spring is upon us
I've just outlined four promising spinoff opportunities ahead, and a slew more await on the horizon. Not all will be home runs, but the hunting ground for big-payoff investments nonetheless looks phenomenal.

If you'd like to come along as we investigate these and other special situations in the marketplace, consider joining special-situation investing expert Tom Jacobs in Motley Fool Special Ops. This is the first time we're opening Special Ops since its initial launch, and membership is limited. If you're interested, enter your email in the box below. We'll send you Tom's exclusive video detailing three special-situations opportunities, along with a private invitation to join Motley Fool Special Ops when it opens later this month.

Alex Pape does not own shares of any company mentioned. General Motors is a Motley Fool Inside Value selection. Fortune Brands is a Motley Fool Stock Advisor pick. The Fool owns shares of Sabra Health care REIT. 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.


Read/Post Comments (5) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 21, 2011, at 8:29 PM, OPTIONNUT wrote:

    Here are my gut reactions to your Spring Investor's Dream Scenario!

    Right now things do not look real promising with looming inflation and world tensions.

    I would sit tight and hope that the US continues to create jobs and cuts government spending.

    So are you ready to jump on Comcast?

  • Report this Comment On February 21, 2011, at 10:22 PM, jomueller1 wrote:

    May be I should not have read this article. I was waiting until the end for something that could be meaningful. Sorry, for me it just a bad as gossip

  • Report this Comment On February 21, 2011, at 10:51 PM, yaiwolf wrote:

    This piece is just to pump their "Special Ops" premium service... pay little attention to this stuff as it's fluff.

  • Report this Comment On February 22, 2011, at 2:10 AM, gilsh wrote:

    i differ with previous responders. this article has two good points anyone should take into his mind:

    1) spin-off investing strategy can be a very

    profitable investing strategy. but it isn't a simple

    buy-every-spinoff method. one should inspect

    the reasons behind the spin, check the teeth

    of the horse being spinned, and learn the

    research of the behaviour of spinnof stocks.

    2) investing is not only about valuation. there are

    known irrational factors operating in the

    market. the forced selling by SPDRs and

    mutual funds is but an example. investors

    should learn these points of irrationality,

    because these, unlike waves of irrationality,

    can be analysed and handled to a very great

    extent, by a rational investor.

  • Report this Comment On February 22, 2011, at 9:24 PM, Glycomix wrote:

    CSPAN this weekend(2/19/2011) broadcast the Obama Administration proposing to the Finance Committee of the House of to raise taxes to 45% on dividends and from 15% to 28% on Capital Gains.

    How will US businesses get funds to export in the future if the Democrats cut off all sources of funding?

    The banks will be broken by the continuation of the Fannie Mae/Freddie Mac Welfare loan.

    What caused the financial collapse? Welfare mortgages used to get votes.

    Democrats insist that congress' banks, Fannie Mae and Freddie Mac, guarantee toxic subprime welfare-loans and turning those loans into securities which investors were duped into buying. According to Greenspan, Fannie and Freddie provided 40% of all subprime loans from 2002-2004(1) The current authorization law requires Fannie and Freddie to continue to guarantee welfare loans to” (A) Low income families, (B) Families that reside in low income areas and (C) very-low income families.” http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_0...... ¶ 1.

    (1) http://www.fool.com/investing/general/2010/03/23/alan-greens......

    HUD set welfare loan goals, called by the codeword “affordable housing goals” for Fannie Mae and Freddie Mac: In 2007 HUD decided that 55% of Fannie and Freddie’s mortgages would go to group (A) above, Low income families who make below $21,000/yr; 35% of Fannie’s guaranteed loans to goal (B) areas with “at least 30% minorities” who make $30,000 or less; and 25% to goal (C) very poor to people who were 60% below the median income. The “very poor” are the same proportion as the 30% of taxfilers who pay no tax. http://www.huduser.org/portal/datasets/GSE/gse2007.pdf In table 2 note 1,

    How can people who don’t make enough to pay tax (group C) afford a mortgage? That’s the problem. About 50% of 2007 subprime loans defaulted in 2009. Fed Chair Alan Greenspan tried to prevent the “systemic crisis” that defaults subprime and Alt-A loans could cause the destruction of the banking system by asking congress to reduce Fannie and Freddie’s welfare loan from 23% to 5% of the mortgage market as it had been under Clinton. All of these loans are likely to fail in an economic downturn, and Banks are funded to only 4% of loans. If they had invested in a significant amount of Fannie Mae’s “mortage debt obligations” which might have a 50% default, they’d be easily bankrupt.

    Instead of protecting the economy and the banking system, the Democrats protected their pork producer, the political credit that they got from these welfare loans. They fired Greenspan and fired Poole when he told that world that Fannie and Freddie were bankrupt by $1.17 Trillion by Jan 2007. At that time they were half of the mortgage market(a). By the time Fannie and Freddie went bankrupt in September 2008, they produced an additional $5.3 trillion in welfare loans because the Democrats forced them to extend the “affordable loans goals” to 76% of the mortgage market. Because the commercial banks that had made subprime loans were going bankrupt in 2007, Frank and Schumer and the Democrat leadership extended the “affordable housing” welfare mortgages to a group three times the size of the bank- mortgage market.(b) In a press release, Sen. Schumer boasted Democrats “forced the Bush regulators” to provide more subprime loans.(c)

    (a) http://research.stlouisfed.org/publications/review/07/05/Poo...

    (b) http://www.c-spanvideo.org/program/281353-101 ) [17:13 (58 seconds)]

    (c) http://schumer.senate.gov/new_website/record_print.cfm?id=28...

    Increasing the subprime loans to three times the size of the regular mortgage market put pressure on Fannie and Freddie executives to find good candidates. The pressure led to their buying any loan, markedly increased the subprime default rate: Lockhart admitted that affordable Housing Goals caused Fannie and Freddie’s executives to guarantee unsafe loans: “HUD goals were too aggressive”.(2) Under the pressure of the HUD’s “affordable housing goals, Fannie and Freddie’s executive bad loans that caused more and more subprime defaults. Housing Wire reported “Standard and Poors now expects the default rate on subprime loans issued in 2005, 2006, and 2007 to be 11 percent, 30 percent, and 49 percent, respectively.”(3)

    (2) http://www.c-spanvideo.org/program/281353-101 [16:12-17:50}

    (3) http://www.thetruthaboutmortgage.com/subprime-default-rate-a......

    As a result of these manipulations, Fannie Mae and Freddie Mac caused the current depression and virtually destroyed European banks. They caused European banks $1 trillion in subprime-mortgage default write downs and US banks $1.6 trillion in defaults causing many bankruptcies and a shaky financial system.

    Fannie and Freddie’s $7.1 trillion in bad loans can’t easily be paid. The entire income of the US government is $1 trillion and the gross income of everyone in the US is only $8.2 trillion. http://www.irs.gov/pub/irs-soi/08fallbulintax.pdf

    If we doubled the tax rate and dedicated it exclusively to pay for our welfare mortgage debt, it’ll take 15 years to pay for the taxpayers pay off what Democrats accumulated in five years.

    To keep the ship of state from sinking we have to fix the leaks: Fannie Mae and Freddie Mac must be deauthorized.

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