In just the past week or so, agreements have been reached on two blockbuster acquisitions. One is the tech marriage of Dell and EMC (EMC) and the other is the sudsy combination of AB InBev (BUD) and SABMiller, the world's largest and second-largest beer brewers. Acquisitions are a time-tested strategy for growing a business.
But other companies have taken the opposite tack by spinning off parts of their operations to better focus on what they perceive as their core business. The use of spinoffs is a corporate strategy capable of producing winners, and investors would do well to consider investing in companies working to get smaller and better focused.
Three companies in particular are worth looking at. Years ago, I automated the strategies of a dozen or so investment gurus, which allows me to analyze any stock in ways similar to how these gurus analyze stocks. One strategy is based on Joel Greenblatt's writings, and this singles out these companies as worthy investments.
The Greenblatt strategy is unusual because it uses only two variables. Earnings yield is used because it calculates how much of a return or yield an investor could expect if he or she were to buy the whole business, including all of its debt, since Greenblatt includes debt in his calculations.
The second variable is return on total capital, which examines how well a company uses the capital it employs.
The strategy ranks each stock from among all the thousands of publicly traded stocks on the New York Stock Exchange and Nasdaq based on these two variables. Those in the top 50 earn the highest recommendation.
Right now, Hewlett-Packard (HPQ) is on the verge of splitting into HP Enterprise, which will consist of infrastructure, software and services to businesses, and HP, which will include the company's printing and personal systems businesses. The company's earnings yield is 13.81% and return on total capital is 59.29%. The combined Greenblatt ranking is a very strong 10, meaning it is ranked No. 10 among all publicly traded stocks.
Another tech de-acquisition comes from Symantec (SYMC), probably best known for its Norton security software. Ten years ago, it bought Veritas, which is in the information management business. In August, it announced investors led by The Carlyle Group would buy Veritas for $8 billion in cash. Symantec is looking to better focus on its core businesses. Symantec's earnings yield is 11.32%, while return on capital is 60.84%, earning the company a Greenblatt ranking of 2.
The final company I want to tell you about is the result of a spinoff, Time Inc. (TIME), which had been part of Time Warner (TWX). Time is a major magazine publisher, whose stable of publications includes Time, People, Sports Illustrated, Fortune and Travel + Leisure. Its earnings yield is 11.52% and its return on total capital is 59.15%. As for its ranking, it is No. 19, one spot ahead of Symantec.
Sometimes, smaller is better, and these three companies prove the point.