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 more than $50 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.
Some upcoming spinoffs
Below are some recent or pending spinoffs that could be attractive investment candidates:
||Huntington Ingalls||March 30, 2011|
||British operations||First half 2011|
Carrols Restaurant Group
||Hispanic Brands||End of 2011|
||Downstream business||June 30, 2011|
It's official: Northrop will spin off its ship-building unit Huntington Ingalls by the end of the month. Owners of Northrop stock will receive one share of Huntington for every six shares of the parent, and new shares will begin trading under symbol HII on March 31. This high-capital, lower-margin, and highly leveraged business is going to look less attractive to most investors than its parent -- making me more interested in it. Add Northrop to My Watchlist, which will find all of our Foolish analysis on this stock.
Banco Santander has plans to spin off its British unit within the next few months. The British unit looks solidly profitable, scoring operating profit of $3.7 billion in the latest fiscal year, a gain of 11% year over year. The British unit captured 18% market share last year. Add Banco Santander to My Watchlist.
Carrols is a small-cap restaurateur that has decided to spin off its faster-growing Hispanic Brands unit and keep its more than 300 franchised Burger King locations. The spinoff will own the Pollo Tropical and Taco Cabana chains, which had combined sales of $439 million last year. In the latest quarter, Pollo Tropical and Taco Cabana had same-store sales gains of 10.7% and 2.3%, respectively, while its Burger King franchises saw comps dip by 6.1%. I'm especially interested in the spinoff, although the Rising Star program will not allow me to invest in market caps less than $200 million. Add Carrols to My Watchlist.
Marathon Oil will spin off its downstream operations, which will be named Marathon Petroleum. The spinoff will be one of the largest refiners in the U.S. and will have operations in the Midwest, Southeast, and Gulf Coast. With oil prices soaring, I'm more interested in the parent here, which will continue to own the exploration and production business after the transaction. Add Marathon Oil to My Watchlist.
One final company I'm still interested in is Frontier Communications
Interested in these spinoffs or have others to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).
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Jim Royal, Ph.D., owns shares of Frontier Communications. The Fool owns shares of Northrop Grumman. 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.