Here’s an interesting look at spinoffs I saw in the WSJ from a few months ago:
Recent spinoffs have seen their shares drop more sharply than the historical trend: Spinoffs typically fall in the first month, recover by the third and start outperforming the market after six months. This happens as more analysts start covering the companies, and the spinoffs' management teams, no longer part of big empires where attention and capital are often spread thin -- are able to expand the businesses more aggressively.
A Thomson Financial study of 200 spinoffs going back to 1996 bears this out. The median stock sank 2.1% one month after its spinoff, but then inched up 1.6% after three months. In six months, the median rose 8.2%, and it climbed 12.7% within 12 months. In the smaller sample of 83 businesses spun off from S&P 500 companies, the average share price was 37.3% higher in 12 months, beating the index's 10-year average return of 6.7%.
I’m not surprised by the initial underperformance, but I doubt the rebound is due to the sudden realization that management can do whatever it wants. I think the initial drop is simply due to a high price set by the parent and a flood of selling by shareholders.
All things being equal, I look favorably at spin-offs. But there must be something worthy of spinning off before we can throw the usual hype about management no longer being constrained.
For example, Eaton Vance (NYSE:EV) spun-off Investors Financial Services (IFIN) and both stocks have been remarkable performers. In fact, IFIN was recently bought out at a very rich premium. Don’t jump at every spin-off. I think DNA matters more than people realize.