Posted by: Aaron Pressman on April 23, 2007
I have a story in this week’s magazine (still behind the subscription wall) about a highly-successful strategy for value investors — spin-off spotting. For a variety of reasons, a pretty simple strategy of buying shares of corporate cast-offs tends to outperform the market by leaps and bounds over long periods. And you can improve your results by being patient once the shares start trading since most spin-offs have a month or two of opening night jitters. Index funds and other investors concerned with hewing to market benchmarks typically sell spin-off shares they receive as a dividend quickly, causing a short-term price dip.
As usual, we didn’t have room in the magazine article for everything worth mentioning. It’s even a bit ironical. The very best spin-off plays tend to be those with the least following on Wall Street and the least pre-deal publicity and hype. They’re also often in mundane or out-of-favor industries. So of course the deals that we cut from the story that were the least sexy and least talked about might also be those with the best payoff. And some that we included, most especially Morgan Stanley’s Discover card unit, might not fit the label of unloved winners so well.
So with that intro, here are a couple of under-the-radar suggestions from Bill Mitchell of the Spinoff and Reorg Profiles newsletter that didn’t make the article, in part because I couldn’t find any U.S. analysts who had scrutinized the upcoming deals. Anglo American plc, the mining giant which trades in the U.S. as an American Depository Receipt (Symbol: AAUK), is getting out of the paper business. Its Mondi unit had an operating profit of $477 million last year. And Barloworld Ltd (BRRAY), a diversified South African holding company, is setting free its 72% stake in Pretoria Portland Cement Co., which could depress the value of the cement unit. Sales at Pretoria rose 18% to 4.7 billion rand ($652 million) last year and operating profit jumped 23% to 1.9 billion rand ($264 million). No analyst write-ups means you have to do your own homework, of course. Fortunately, paper and cement are pretty straightforward businesses with plenty of comparables.
And there’s also an exchange-traded fund in this space, the Claymore/Clear Spin-Off ETF (CSD). It’s based on the index compiled by Clear Asset Management, a New York firm that we mentioned in the story. The index has a few rules and doesn’t include every spin-off. Top postions as of December included Ameriprise Financial (AMP), CBS (CBS), Clear Channel Outdoors (CCO), Embarq (EQ) and Viacom (VIA). You can see the back-tested track record at Clear’s web site. My gut reaction to all of the ETFs built on formulas with impressive back-testing is to wait and see how they perform in the real world. Hedge fund manager and writer James Altucher likes the fund but recommends cherry-picking it holdings. And don’t forget the IPO ETF that I wrote about last year, the First Trust Advisors IPOX-100 Index Fund (Symbol: FPX), which also includes lots of spinoffs. It’s up 18% in the year plus a week since it started trading.