This month I am going to look at how you can profit from company spin offs and I will give you a few examples from you own account.
A spinoff is the creation of an independent company or in some cases more than one company through the sale or distribution of new shares of an existing listed company to shareholders holding the parent company at a certain date.
A company may choose to spin out a business which could have hidden value or it may be a less attractive business which they wish to distance from the parent company and protect the main business.
Spin offs can also lead to takeovers
Let me give you a few examples from my own account.
A recent example is Whitewave Foods (WWAV) which has been taken over by French group Danone. Whitewave was in fact part of the dairy company Dean Foods (DF) and was spun off in October 2012 since then its up 200%. It is highly unlikely that Danone would have taken over Dean Foods but the spin off made it possible for them to purchase the part they wanted which was the higher margin plant based products such as Soya and Almond milk.
Another example was Fortune Brands from a few years back. This was a mixed company which owned a golf business, a security & home improvement business and a spirits business Maker’s Mark, Southern Comfort and Jim Beam. Hedge fund Pershing Square led by Bill Ackman pushed for the business to be spun off and the golf business was sold. The spirits business was listed as BEAM and the home security – Improvement business is still listed as Fortune Brands Home Securities (FBHS)
If you’re looking for BEAM you will not find it as Japanese drinks company Suntory Holdings made a bid for BEAM in January 2014. Had Beam remained part of Fortune Brands it would much harder for Suntory to make a takeover bid. On the subject FBHS remains a good stock and a good play on the US housing market recovery. The stock started trading in September 2011 and is since up 340% and I continue to hold it.
Let me now give you a recent example and one I still see value and that is Hertz Rental Cars (HTZ) and Herc Holdings (HRI). Hertz rent a car is familiar to most however you may not be aware that Hertz also has a large commercial rental business ranging from construction equipment, power tools and generators. Hertz spun off the commercial division back in June. Its still early days but I see value in owning both sides. A spin off can take 12 months+ to start seeing value so it’s not for short term trader.
SPIN OFF ETF (CSD)
There is an Exchange Traded Fund which tracks U.S. domiciled companies that have been spun-off from a parent company within the last four years and have a float-adjusted market capitalization of at least $1 billion. The Guggenheim S&P Spin-Off ETF holdings can be found here: http://gi.guggenheiminvestments.com/products/etf/csd
This ETF however does not hold the parent companies which in many cases also benefit.
A good source of upcoming spin off information is this site: http://www.stockspinoffs.com/upcoming-spinoffs/
A stock which I have purchased this is year is Aluminium giant Alcoa (AA) Alcoa is planning to spin out its higher margin aerospace and auto parts – metals business which will be called Arconic and is expected to complete the spin off before the end of this year.
As an Alcoa shareholder you will be given the new shares in Arconic. Alcoa is currently trading around $10 a share and I can see a 40% upside once the spin off happens and is allowed to settle down over the next 12 months.
Trading veteran Vince Stanzione has been trading for over 30 years and has produced a home-trading course at www.fintrader.net He stresses that before you try trading it’s worth getting some training. He is also the New York Times bestselling author of The Millionaire Dropout published by Wiley.