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Amidst the current carnage, it feels a bit disingenuous singling out one or two individual stocks for poor performance, but some spin-offs have taken quite a beating recently.
Just prior to the increase in market ‘volatility’, nursing home operator and health care REIT stocks nose-dived because the CMS announced a harsher than expected (11.1%) cut in Medicare reimbursement payments. As a result, Sun Healthcare (SUNH), which spun off Sabra Healthcare REIT (SBRA) last year (check out our earlier post here), lost over half of its value in a single day. Some analysts predict these changes could wipe out the entirety of Sun’s 2012 earnings and put the company at risk of breaching debt covenants. Ouch. Naturally, companies associated with the industry also took a hit, including Sabra and other healthcare REITs. This isn’t surprising because even though Sabra has been on an acquisition tear recently, the company still has 79% ‘exposure’ to Sun. For now, it appears their fates are somewhat intertwined.
The industry is facing some headwinds with the new regulatory environment and Uncle Sam ostensibly shifting to cost cutting mode. That said, generally whenever entire industries are cut down in a broad swath, it usually represents a buying opportunity for the proverbial ‘baby’ in the bathwater. In fact, some of the names have already recovered a bit since then and potential solutions to these issues are being bandied about. I haven’t had a chance to take a closer look yet, but feel free to post any comments below.
Another spin taking a beating is AOL (AOL) which got hit hard after its most recent earnings release and has lost half of its value over the past year. That long troubled name is a separate story though.
Both of these spins were profitable at some point (even if only for a brief window), but unfortunately not every name works out and often for unpredictable reasons. Like every investment though, need to do the due diligence and constantly reevaluate the company and its industry’s prospects.
Disclosure: Author holds no position in any stock mentioned.
APERAM is another spin-off that has suffered greatly recently, currently trading at around 1/3 of book value.
http://sportgamma.net/2011/08/03/profile-aperam/
Indeed. It has been a rough period for the entire steel industry.
Very different business, but another spin which has dropped a bit and looking interesting is Huntington Ingalls (HII). Here is a recent write up on it (the comments below are worth a read as well): http://seekingalpha.com/article/292939-huntington-ingalls-industries-certainly-worth-a-look-at-current-levels