Making money in the stock market is no easy task these days. There are a number of oft-cited reasons for the market's fearful mood, but as any astute student of investing can tell you, uncertainty brings plenty of opportunity to earn outsized gains for those willing to look out past short-term turmoil.
Having some serious overweight positions in energy shares and commodity firms has been a path to gains lately. But in the spirit of locating overlooked areas of the market to profit from, I want to talk about investing in spinoffs. Companies choose to break into separate parts for a number of reasons, but the moves stem primarily from a basic need to create shareholder value. Often, letting two usually disparate businesses go their separate ways is the best way to help shareholders. The benefit for investors is that stocks of companies that are spun off and left to their own devices have a solid track record of beating the market.
Why the outperformance? The key benefit is that newly independent firms are allowed to focus on their core business and make their own decisions on how to best compete in the market they know best. There's no better example of this phenomenon than Motley Fool Stock Advisor recommendation Coach (NYSE:COH), which is up more than tenfold since it was spun off from Sara Lee in 2000.
With that goal in mind, here are a few more spinoffs whose valuations make them quite interesting.
An opportunity with plenty of fizz
One of the more recent spinoffs, Dr. Pepper Snapple (NYSE:DPS), was recently freed from Cadbury so that the parent company could better focus on its confectionary business. In a phenomenon common to spinoffs, last week Dr. Pepper Snapple hit a new low, as Cadbury shareholders likely sold their positions without giving Dr. Pepper much serious thought.
Dr. Pepper Snapple plays a distant third fiddle to industry giants Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP), but its third-place position is still respectable in a business known for steady sales and juicy profits. Independence also brings the ability to grow into more appealing beverage markets and acquire geographic diversity. At recent lows, the price is looking right to drink in some shares.
Two fine financials
The financial sector has been anything but fine recently, but two recent spinoffs continue to make their way along despite touchy economic conditions and credit-induced turmoil. The first is Motley Fool Inside Value recommendation Discover Financial (NYSE:DFS), the fourth-largest credit card brand, which was spun off from Morgan Stanley (NYSE:MS) late last year.
Credit pressures may persist until consumer spending worries subside, but Discover just posted second-quarter results firmly ahead of analyst projections. It also owns a lucrative third-party payments system and garners plenty of fees for handling financial transactions. Meanwhile, Metavante (NYSE:MV), another Inside Value selection, was also spun off last fall and delivers similar banking and payment services. Both Discover and Metavante are trading near their lows and have plenty of upside potential.
The Foolish spin
I'm not calling for Coach-like performance in the above spinoffs, but each are blessed with favorable positions in their industries and have plenty of potential to further establish themselves as bona-fide, independent leaders. If that happens, look for a big bounce in these names.
