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.