Smart Ways to Invest in Spinoffs

spinoffsThere are a lot of spinoffs going on right now. Part of what’s driving this has been the rise of shareholder activism. With that, it’s been a summer full of spinoffs thus far, with over 10 new companies debuting in the last two weeks.
However, some of the most recent spinoffs have had a tough go of it. The DuPont (NYSE: DD) spinoff Chemours (NYSE: CC) has fallen more than 40% since it started trading in June. Communications Sales & Leasing (NASDAQ: CSAL) has fallen more than 20% since April. Its former parent company Windstream (NASDAQ: WIN) is off more than 55% since then. The Occidental Petroleum (NYSE: OXY) spinoff of its California assets, trading as California Resources Corp. (NYSE: CRC), is down 35% since coming public at the end of 2014.
Scary numbers indeed. But it’s not all bad.

Be Selective

The key is to become more selective in how you invest in spinoffs. In Joel Greenblatt ‘s book “You Can Be a Stock Market Genius,” the famed investor talked about spinoffs and their propensity to outperform the market. The key thesis is that some spinoffs falter out of the gate because certain shareholders don’t want to own the company, so they sell it.
In Greenblatt’s book, he put forth the notion that spinoffs and other value techniques will outperform the market over the long term. He put it to the test using his hedge fund, Gotham Capital, which over a span of 20 years generated ridiculous returns of 40% annually.
Although a bit dated, the more popular spinoff research study from 1993, “Restructuring Through Spinoffs,” found that spinoffs tend to outperform the S&P 500 by some 30% over the first three years.
Case in point: A little more than a year ago I wrote about spinoffs and dividends, which is a rare combo. The feature back then was Abbott Laboratories (NYSE: ABT) spinoff AbbVie (NYSE: ABBV). AbbVie was yielding around 3% and was operating a very attractive, stable pharma business. Since that piece, shares of AbbVie have returned 37.5% on a total return basis (stock price appreciation and dividends), versus a total return of 12.5% for the S&P 500.

A Diversified Approach

The options for investing in spinoffs are limited, however. Either you put in the time and due diligence and try to assess every spinoff, or you take the more diversified approach of investing in the Guggenheim Spinoff ETF (NYSEArca: CSD).
Over the last five years, the spinoff ETF has returned 139% versus the 92% return on the S&P 500. The spinoff ETF owns 40 to 50 companies and does the heavy lifting for you. The other key is that it tends to stick to the more stable spinoffs with established businesses. For example, the current top holdings of the spinoff ETF include WhiteWave Foods (NYSE: WWAV), AbbVie, Allegion (NYSE: ALLE) and Zoetis (NYSE: ZTS).
All of those are interesting names. But there are a few recent spinoffs that have trended downward a bit that could still be worth buying.
One spinoff that could turn out to be similar to AbbVie in terms of eventually offering a dividend and still having solid growth opportunities is Energizer Holdings (NYSE: ENR). Energizer is the household products business after spinning out from the legacy Energizer company. Its business includes batteries and lighting products under the Eveready and Energizer brands. Don’t underestimate the power of a small cap ($2 billion market cap) niche company.
But in the end, the more diversified and safer approach might be the spinoff ETF, which has shown to still handily beat out the broader market.

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