The quickest way for a team to get bounced out of the NCAA tournament is to underestimate an opponent.
So far, no No. 16 seed has beaten a No. 1 seed, though four No. 15 seeds have upset No. 2 seeds. We see most of the upsets from teams seeded 11, 12, and 13. In 2006, the story of the tournament has to be George Mason, the 11-seed that made it to the Final Four. I don't think anyone is underestimating them now.
Spinoffs beat the market
As investors, we don't want to get caught underestimating potential opportunities. In his book, You Can Be a Stock Market Genius, investor extraordinaire Joel Greenblatt laid out one type of opportunity the market often underestimates: spinoffs. As Greenblatt's 40% annualized returns since 1985 would indicate, he has been able to upset the market quite often during his career.
Why are spinoffs poised to beat the market? It's usually because following the spinoff, there is considerable selling pressure on the new company's stock. This pressure causes the stock price of the spinoff (and sometimes the parent company) to be mispriced, giving observant value investors a chance to scoop up a bargain before the market realizes its mistake. And the funny thing is, investors underestimate the potential for spinoffs time and time again.
Two examples
In May 2004, GE spun out insurance and investment services provider GenworthFinancial
In July 2004, Motorola
Admittedly, Freescale Semiconductor was never on my screen as a potential investment. But Genworth certainly was; I was a GE employee at the time. Yes, you guessed it -- I overlooked that opportunity.
An upset in the making?
Recently, Cypress Semiconductor
But according to a Barron's article last week ("Top Spins" by Andrew Bary), the market may be up to its funny old tricks again.
A little bit of history should put the Cypress/SunPower story in perspective.
3Com spun out Palm
As was written in the Barron's article, Cypress traded at $17 per share as of March 10, 2006. Its stake in SunPower is about $14 per share, leaving the rest of Cypress' business valued at $3 per share. So is this an upset in the making, where the market will revalue Cypress' shares upward? It could be, but only if the shares of SunPower aren't overvalued at $38.
The Foolish bottom line
While spinoffs by no means guarantee an upset, they have certain characteristics that increase the probability of market-beating returns.
The Motley Fool Inside Value newsletter service thinks it's found a spinoff opportunity that could beat the market. LibertyMedia carved out Discovery Holding
Fool David Meier owns shares of General Electric, but no other company mentioned in this article. Palm is a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.