It stands to reason that stock prices go up or down due to the laws of supply and demand. Find a business that is demanded more by investors than the available supply and the economic law will take over.
This economic law works in investors' favor often with spun out companies, but initially in reverse. Investors who understand the potential value in spinoffs can use this little "glitch" to their advantages more often than not.
It's a rather simple process: a company is deemed too complicated or underperforming because a business division is viewed as an anchor to the core business. That division is sold or spun off to existing shareholders. Those shareholders who are interested in owning the original good business immediately sell the shares of the new spun out entity.
You can guess what happens next. The oversupply caused by the selling creates an attractive entry price for new investors. Or, Mr. Market, who also favors the original business, assigns a low valuation multiple to the spun out entity. The end result is the same, however. The spun out entity offers a compelling valuation that is usually realized once the new business becomes better understood and realized by the market.
Back in January of this year, I wrote about Remy International (REMY), a supplier of automotive components that was spun out of Fidelity National Financial (FNF). Remy was your classic spinoff. Fidelity, a financial company, no longer had any interest in owning an automotive parts company that was not part of its core business. REMY climbed as high as $24 in the subsequent months but now trades for just above $20 again. The average of analysts' estimates has a one year target estimate of $28.50 on the stock, according to Reuters.
Barnes & Noble (BKS), which announced its intent to spinoff its educational business into a separate business later this year, Barnes and Noble Education (the ticker will be BNED), could have a breakup value of over $35 a share compared to $26 today. This is a spinoff to watch.
Energizer Holdings (ENR) recently completed a spinoff of its legacy battery business. The personal care business took the name Edgewell while the spun out company took the legacy name. In less than a month, Energizer Holdings' stock climbed to $37 from $32 and still yields 2.7%.
Another spinoff to look out for is Armstrong World Industries (AWI) which plans to separate its high growth ceiling business from its legacy flooring business. The flooring business is likely to trade at a depressed valuation and perhaps create some interest from consolidating competitors.
Another good way to follow spinoffs is to pay attention to an ETF like the Guggenheim Spin-Off ETF (CSD), an ETF that invests only in spinoffs. So far the year to date return is 2.4% versus 1% for the S&P 500.
Anyway you spin it, spinoffs are a sweet spot for finding great ideas.