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2 Special Situations I'm Watching Closely

By Jim Royal - Updated Apr 6, 2017 at 8:32PM

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Keep an eyeball on these spinoffs.

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, 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.

So below are two spinoffs that I'll be watching closely.

Parent

Spinoff

Timeline

ConocoPhillips (NYSE: COP)

Refining business

First half of 2012

Ralcorp (NYSE: RAH)

Post cereal business

Late 2011

Once is a coincidence, twice is a trend. So it looks like Conoco might be setting the fashion of integrated oil companies spinning off their refining divisions. Conoco is following in the footsteps of Marathon Oil (NYSE: MRO), which completed its own spin of Marathon Petroleum (NYSE: MPC) last month. The move will leave Conoco as a pure exploration and production company and will create the largest independent U.S. refiner and largest E&P. Marathon shares performed nicely from the time of the spinoff announcement, and Conoco shares have also gone up following the news on Thursday.

With upward pressure on oil prices and narrow margins for many refiners, some analysts are speculating that supermajors ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and BP (NYSE: BP) could be contemplating spinoffs of their refinery operations in order to juice shareholder returns. One Bloomberg report suggested that BP was under pressure to follow Marathon and Conoco. However, Chevron and BP have said they have no plans to spin off their refining operations. Add ConocoPhillips to your watchlist by clicking here.

Ralcorp announced that it would spin off its Post cereals unit in four to six months. The move comes about four years after the unit was acquired for $1.65 billion. The spinoff will take on as much as $1.2 billion in new debt, with perhaps $1 billion of that cash being funneled to Ralcorp before the spin. Post generated $958 million in sales over the last four quarters. Ralcorp is in the midst of a takeover attempt by ConAgra, which has offered $4.9 billion for the company. Add Ralcorp to your watchlist by clicking here.

Interested in these stocks or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

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. Motley Fool newsletter services have recommended buying shares of Chevron. 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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Stocks Mentioned

ConocoPhillips Stock Quote
ConocoPhillips
COP
$101.36 (1.26%) $1.26
BP p.l.c. Stock Quote
BP p.l.c.
BP
$31.29 (1.16%) $0.36
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$156.28 (0.83%) $1.28
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$92.20 (0.81%) $0.74
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
MPC
$98.62 (2.04%) $1.97
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
MRO
$23.41 (1.56%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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