Forbes: Spinoff Stocks Are ‘Sizzling’

Investing in spinoffs is certainly becoming more ‘mainstream’. As proof, Forbes’ most recent issue had a long writeup on the space titled ‘Why Spinoff Stocks Are Sizzling (And Should Stay Hot)‘. The piece is worth checking out and discusses the usual spinoff investment stuff – elimination of the conglomerate discount, corporate discard, ignored by market etc. – along with some additional details on a few recently spun off companies.

The article also highlighted the strategy’s recent performance data and it is easy to see why spinoffs are a popular area:

According to S&P Capital IQ, U.S. companies have completed 82 major spinoffs, valued at $530 billion, since January 2002. For those valued at more than $500 million, the spinoffs have delivered a total return of 70%, compared with 22% for the S&P 500. (Their former parent companies have not fared too poorly either, returning 35%.)

Not bad! It also seems like things are picking up:

The pace has quickened over the last two years. There have been 19 major spinoffs since January 2011 versus only 5 in 2010 and 4 in 2009.

It certainly has felt that way running this site and regular readers shouldn’t be too surprised by that fact. It is interesting that the data ignored the small-cap space (and the rest of the world), where there is also a lot of spin activity. Talk about really being ignored.

For investors in spinoffs, the really good news is that the trend is expected to continue:

Tim Koller, a McKinsey & Company partner who leads the firm’s corporate finance practice, says that while there is a cyclical nature to the recent spate of spinoffs owing to a weak global economy, there are also secular factors prompting more spinoffs. Chief among them is a movement away from complexity toward simplicity. Koller says investors can expect more spinoffs in the coming years.

I agree, but part of me can’t help but wonder if we are witnessing a ‘golden age’ of spinoffs. Corporate fads are often cyclical so I wouldn’t be surprised if the mentality were to change in the near future leading to a bare pipeline. Luckily they take so long to complete that there is plenty of time for new ones to be announced.

In many ways it is truly amazing that it is still possible to achieve those levels of returns in this area. It is definitely no secret. Joel Greenblatt discussed this phenomenon in his famous book and more recently in his interview with Columbia Business School’s Graham and Doddsville newsletter. If he still believes there are still opportunities and the supporting data is there, who am I to argue?