My Special Situations portfolio took a stake in Harvard Bioscience (NASDAQ:HBIO) before its recently completed spinoff of Harvard Apparatus Regenerative Technology (OTC:BSTG). That was in January of last year, and the combined position has risen about 39%. Not bad. But the outlook for the parent company is not as rosy as I had expected, and my expectations were not that high to begin with. So I've decided to sell the parent and retain shares in the spinoff.
Under my original thesis, I expected the spinoff to free up significant cash flow in the parent. Harvard Bioscience was spending $6 million per year floating the revenue-less Harvard Apparatus. My expectation: When it no longer had to fund that company's expenses, that cash flow would be apparent on the parent's ledger. It was a classic spinoff situation setup. And to some extent, it happened. My portfolio got shares in the new company, and the price of the parent rose, too.
But the post-spin situation at Harvard Bioscience looks less attractive than I had originally anticipated. The company made some nice moves in cost-cutting, and then reinvesting some of that cash in the business. But management stressed that 2014 would be a year of consolidation, before growth (maybe) picks up in 2015.
I might be willing to wait around for that if I weren't more concerned about the business model generally. The parent grows sales largely by buying up other niche product makers and then plugging them into its distribution network. But while the top line has grown nicely over more than a decade, I remain unimpressed by growth at the bottom line. So this is not a business that I want to own longer term.
For now, I'm retaining shares of Harvard Apparatus. It's something of a lottery ticket, I realize. But I like the fact that the parent's managers left to head up that unit, usually a very good sign, especially when they had the safety of a mildly profitable parent cutting them biweekly checks. The potential returns are immense, but like many stocks in the biotech space, it's largely a binary proposition. For now, I'm watching and waiting.
Foolish bottom line
When Harvard Bioscience announced its spinoff, the stock price discounted little. So even with what I judge as poor performance at the parent, the position is still up nicely -- 39% in just more than a year. I'll take those gains and redeploy them into other outperforming special situations. If you'd like to know what my next pick will be, follow me on Twitter @TMFRoyal. I've got some great ones coming up.