As investors and companies look for new ways to create value in a relatively low growth economy, the spin-off is decidedly back en vogue.

spin-off

The reasons behind the trend are varied. To the skeptic, the spin-off’s primary beneficiary is Wall Street bankers who collect fat fees when companies embark on a major restructuring.

But in truth the reasons are far more investor-friendly. A successful spin-off can unlock dormant value in a business unit that can go forth and flourish on its own.

If things continue as expected, 2014 will likely go down on record as the biggest year for spin-offs since 2000. The current projection is for 61 spin-offs this year, just shy of the 66 recorded in both 1999 and 2000. That level is well above the average annual rate of 32 over the last five years.

It doesn’t take much looking to find examples of companies that have done well after completing spin-offs.

Lands’ End (Nasdaq:LE) has rallied over 30% after being spun out of Sears Holdings (Nasdaq:SHLD) in April, 2014. Murphy USA (NYSE:MUSA) is up 62% since being spun-out of Murphy Oil (NYSE:MUR) in the August 2013.

And shares of Home Depot Supply (NYSE:HDS) are up 62% after going public as a stand-alone entity in June 2013. The industrial supply segment was sold by Home Depot (NYSE:HD) in August, 2007 and spent several years as a privately held company before going public last year.

By the way, Home Depot’s stock is up 230% since it spun off HD Supply.

It used to be that conglomerates were sought after for the security that came with diverse operations. But purer businesses have become more sought after as it’s become easier for investors to gain diversification by simply owning shares in different companies.

Plus, research shows that, on balance, pure-play companies do actually perform better. The reasons are varied. From a managerial perspective, a pure-play business may have more flexibility to pursue value-creating initiatives within its own industry.

From a capital perspective, a pure-play can establish a capital structure that is appropriate for its line of business. For example, a slow growth manufacturing company may want to use more leverage than a fast growth software company.

And from a financing perspective, a pure-play can better use its stock as currency to fund future acquisitions.

Whatever the precise reasons, one thing is clear – the market tends to like companies with a more singular focus. Whether they are growth or income-related investments spun-off companies have tended to warrant higher valuations and have performed better post-split.

The trend isn’t going away soon. In just the last couple of months a number of high-profile spin-offs have been announced.

Madison Square Garden (Nasdaq:MSG) has talked about splitting up its entertainment business from its sports and media business, which includes the New York Knicks and Rangers.

Ebay (Nasdaq:EBAY) has released plans to split off PayPal.

And Energizer (NYSE:ENR) has talked about splitting its household business (including Energizer and Eveready) from its personal care business (including Banana Boat and Schick).

One simple way to quantify the performance of spin-offs is with an ETF designed around the event. The Guggenheim Spin-Off ETF (NYSE:CSD) is re-balanced semiannually and only includes companies that were spun-off 6 to 30 months prior to the rebalance date.

Since the beginning of 2010 the CSD is up 145%, as compared to an 82% rise in the S&P 500. While comparable performance obviously fluctuates over time the long-term value in spin-offs is clearly tantalizing for managers and investors alike.

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Published by Wyatt Investment Research at