In his book You Can Be a Stock Market Genius, stock market genius and Voyager chief medical officer look-alike Joel Greenblatt devotes a full chapter to spinoff investing, citing a 1988 study showing that spinoff companies outperform the S&P 500 by about 10% per year in the three years following the spinoff. Greenblatt also notes that spinoff stocks tend to do even better after their first year, during which a lot of structural selling occurs. While the study is nearly 25 years old, one need only look at the success of big-name spinoffs such as Coach or Yum! Brands to see the potential.
Unfortunately, it's hard to tell when a spinoff is a powerful division being unleashed Jet Li-style, and when it's just a convenient place for a troubled company to dump its trash. When a spinoff does look good, waiting a year for the selling to finish may mean a missed opportunity. Here are three recent spinoffs I'm watching, one of which I might have to keep watching.
Rouse is a real estate investment trust recently spun off from General Growth Partners. Since emerging from bankruptcy protection in late 2010, GGP has been following the guidance of activist investors, like Bill Ackman and Brookfield Asset Management. Ackman was influential in crafting the GGP spinoff of Howard Hughes Corp.
Rouse was formed to take some of GGP's debt and some of its Class B mall properties (think "B-list actor"). This sounds like a bad deal, but that's part of why it makes a good opportunity. The company is currently valued at just about book value, while other mall operators, GGP included, trade for much higher multiples.
Another reason Rouse is undervalued stems from the fact that Rouse has lower performance metrics than even its B-list peers. Management believes this is because Rouse did not exist prior to the spinoff, with its properties managed only as part of GGP's much larger portfolio. The current management is now dedicated to Class B mall investments, and that increased focus will lead to greater efficiencies and better investments.
While Rouse's stock price has been heading down for several months, there is reason to have faith. As part of the spinoff agreement, Brookfield gave a strong vote of confidence by agreeing to backstop a $200 million rights offering in February, buying several million shares at a price of $15 each, much higher than today's stock price.
2. CVR Partners
Every time I write an article about Terra Nitrogen
But when it comes down to operations, I tend to prefer Terra. It sports an operating margin nearly 20 percentage points higher, and a far quicker cash conversion cycle, at times allowing it to turn a dollar invested into a dollar of profit before a sale is even made, allowing it to effectively finance itself interest-free.
So why recommend CVR? For one thing, it's catching up fast. Since its debut, CVR has improved operating margin from just 11% to 47%, versus Terra's still-impressive 36% to 64% climb. As a result, net income at CVR has risen 338% versus Terra's 154%. The company recently increased its full-year earnings guidance, and the full-year dividend along with it. CVR's dividend yield is currently about 1.5% higher than Terra's, with a slightly lower P/E as well, signaling that now might be a good time to see what the other side has to offer.
TripAdvisor is a recent spinoff from Expedia (dot-com!). It essentially functions as the Yelp of traveling, allowing users to read reviews of airlines, hotels, restaurants, and vacation rentals written by real people. While the company gets 55% of its revenue in the United States, it has locally branded websites in 29 other countries, including China, and international sales have become an increasingly large source of sales. This represents a fantastic opportunity, as a rising middle class in countries like China begin to take more vacations and travel more.
Unfortunately, TripAdvisor has gone on quite the trip itself, rising some 72% since its debut. This is one stock that didn't experience the usual initial selling pressure, but took off right out of the gate. While it has strong growth opportunities ahead, I think your best bet would be to just add it to My Watchlist and wait to see if it comes back around.