Spin-Offs: Great Value Even After Cat's Out Of The Bag

by: Special Situations Monitor

As a follower of Joel Greenblatt's special situations investing philosophy, I look at all domestic spin-offs and frequently invest in them, usually holding on to parent company stocks as well.

Many, if not most spin-offs directly result from activist investor demands. Examples of such activist funds include JANA Partners, Pershing Square, Corvex Management and Third Point. In limited cases, managements break up their companies without any investor agitation. However, in almost all cases, spin-offs are effectuated to increase shareholder value.

Those of you who follow or invest in these types of special situations, must notice, usually with dismay, the initial pop to the stock when a spin-off is formally announced or publicly demanded.

At times the increase in share price of a parent company on announcement is so big that it could easily discourage you from following the situation any further - the thinking being that the easy money has already been made so why bother?

Using a limited sample, I am going to illustrate that even if you had invested blindly in an equal-weighted portfolio of 2011 spin-offs, creating your positions on the first day of spin-off trading, you could have outperformed the stock market (I used S&P 500 Mid Cap Index) by a whopping 20% by the end of 2012!

Here is a list of 13 spin-offs which I tracked in 2011.

Spin-Off Spin-Off Began First Day Price On Price Excess
Ticker Company Trading Close 12/31/12 Return Return
LMOS Lumos Networks Corp 10/31/11 $11.10 $10.02 -10% -25%
AMCX AMC Networks 6/16/11 $35.49 $49.50 39% 30%
GNE Genie Energy Ltd. 10/26/11 $8.60 $7.10 -17% -34%
ORIG Ocean Rig UDW Inc. 10/6/11 $14.95 $14.93 0% -26%
MPC Marathon Petroleum 6/24/11 $37.25 $63.00 69% 61%
HII Huntington Ingalls 3/22/11 $37.49 $43.34 16% 9%
WPX WPX Energy, Inc. 12/12/11 $19.25 $14.88 -23% -40%
VAC Marriott Vacations Worldwide 11/8/11 $17.99 $41.67 132% 119%
XYL Xylem Inc. 10/13/11 $24.25 $27.10 12% -10%
XLS Exelix, Inc. 10/13/11 $11.50 $11.27 -2% -23%
FBHS Fortune Brands Home & Security 9/16/11 $12.70 $29.22 130% 112%
MMI Motorola Mobility** 1/4/11 $25.05 $40.00 60% 48%
TRIP TripAdvisor LLC 12/7/11 $27.45 $41.92 53% 37%
             
             
MEDIAN         15.6% 8.7%
AVERAGE       35.2% 19.9%
HIGH         131.6% 119.1%
LOW         -22.7% -40.0%
Click to enlarge

* Acquired by Google

Source: Bloomberg, Yahoo Finance

Of course you could have done better or worse by picking certain spin-offs for your portfolio but heck, 20% outperformance without a lot of extra work isn't too shabby.

In case you are wondering how the parent-company stocks performed:

Parent Parent   Ex Date Price Price Excess
Ticker Company Ex Date Close 12/31/12 Return Return
NTLS NTELOS Holdings Corp 11/1/11 $25.07 $13.11 -48% -67%
CVC Cablevision 6/30/11 $25.96 $14.94 -42% -47%
IDT IDT Corporation 10/31/11 $11.50 $9.54 -17% -32%
DRYS DryShips, Inc. 10/6/11 $2.39 $1.60 -33% -59%
MRO Marathon Oil 7/1/11 $32.95 $30.66 -7% -10%
NOC Northrop Grumman 3/31/11 $62.71 $67.58 8% 5%
WMB Williams Companies, Inc. 1/3/12 $26.82 $32.74 22% 7%
MAR Marriott International, Inc. 11/9/11 $30.23 $37.27 23% 6%
ITT ITT Corporation 11/1/11 $18.80 $23.46 25% 6%
ITT ITT Corporation 11/1/11 $18.80 $23.46   -19%
BEAM Beam Inc. 10/4/11 $44.70 $61.09 37% 5%
MSI Motorola Solutions 1/4/11 $39.77 $55.68 40% 28%
EXPE Expedia Inc. 12/21/11 $27.89 $61.44 120% 103%
             
             
MEDIAN         14.9% 4.6%
AVERAGE       10.6% -5.6%
HIGH         120.3% 103.3%
LOW         -47.7% -66.5%
Click to enlarge

Source: Bloomberg, Yahoo Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.