Numerous financiers, including Joel Greenblatt (Trades, Portfolio), have posited that investors can beat the market by investing in spin-offs – small portions of larger companies separated to stand as their own, independent company. But is this true? This is a question that GuruFocus writer Vera Yuan pondered in her article, “Can Spin-Offs Beat the Market?” Her research concluded that 52 weeks after being spun off, all spun-off companies since 2009 collectively outperformed the market by 84.28%. For this reason, GuruFocus introduced the “Spin-Off List” screener, which tracks all companies spun off since 2013.
Investment gurus tracked by GuruFocus also deal heavily in spin-off companies. The most bought or held spin-off companies among their holdings are: Now Inc. (DNOW, Financial), AbbVie Inc. (ABBV, Financial), Liberty Media Corporation (LMCA, Financial), News Corp (NWSA, Financial) and Allegion Plc (ALLE, Financial).
Now Inc. is held by 30 gurus as of March 31, 2014, the most of all spun-off companies. Dodge & Cox report the largest holding, with 3,276,246 shares, and Warren Buffett (Trades, Portfolio) is the third-largest holder, with 2.22 million shares.
Now Inc. came into being on May 30, 2014, when National Oilwell Varco Inc. (NOV, Financial), an oil and gas drilling equipment manufacturing company, spun off its distribution business into an independent public company. National Oilwell Varco creates and manufactures oil and gas drilling equipment.
National Oilwell states that DistributionNow is one of the largest distributors to the energy and industrial sectors, selling a mix of products to all phases of the industrial market segment, as well as supply chain solutions. Its U.S. and international operations comprise 300 locations around the world.
Since the spin-off, the company’s share price has declined by 5.92%.
Under the terms of the spin-off, investors of National Oilwell received one share of Now Inc. for every four shares of NOV common stock they held.
For fiscal year 2013, Now reported $4.3 billion in revenue, $147 million in net income, $101 million in cash holdings, $262 million in free cash flow, an 8.16% return on equity and gross margin of 8.96%.
AbbVie is held by 21 gurus, as of March 31, 2014. PRIMECAP Management (Trades, Portfolio) has the largest position, at 6,335,722 shares. They are followed by Jim Simons (Trades, Portfolio), who holds 2,796,900 shares.
PRIMECAP purchase history:
AbbVie originated as a spin-off of Abbott Laboratories, a diversified health care company, on Dec. 12, 2012. Shareholders received one share of AbbVie for every share of Abbott owned. AbbVie was the research-based specialty biopharmaceuticals company.
Since the spin-off, AbbVie’s share price increased by 56.78%, beating the S&P 500 by 23.07%.
AbbVie increased its revenue to $18.8 billion in 2013 from $18.4 billion in 2012, with net income of $4.13 billion, decreased from $5.28 billion the previous year. The company has $9.6 billion in cash, and generated $5.8 billion in free cash flow, a 91.9% return on equity and 75.6% gross margin in 2013.
It has a P/E ratio of 21.3, P/B ratio of 18.5 and P/S ratio of 4.58. The P/E ratio and P/S ratio are both near their respective two-year highs.
Liberty Media Corporation (LMCA, Financial)
Liberty Media is held by 19 gurus, as of March 31, 2014. The largest shareholder is Warren Buffett (Trades, Portfolio), who owns 5.3 million shares. He is followed by Murray Stahl (Trades, Portfolio), holder of 4,656,039 shares.
Warren Buffett (Trades, Portfolio)’s holding history:
Liberty Media Corporation is a spin-off of Starz (STRZA, Financial)(STRZB), beginning Jan. 11, 2013. Its principle businesses are its subsidiaries Atlanta National League Baseball Club Inc. and TruePosition Inc., equity affiliates Sirius XM Ratio Inc. and Live Nation Entertainment Inc., along with equity stakes in Barnes & Noble (BKS), Time Warner Inc. (TWC) and Viacom Inc. (VIA).
Since the spin-off, Liberty Media’s stock has gained 20%.
For 2013, Liberty Media reported $4 billion of revenue, $8.78 billion in net income and $1.03 billion of free cash flow. The company has a 62.4% return on equity and gross margin of 66.7%.
The P/E of Liberty Media is 20.7, the P/B is near a one-year low at 1.0, and the P/S ratio is near a two-year low at 3.57.
News Corp is held by 17 gurus, as of March 31, 2014. The largest guru stakeholder is Richard Pzena (Trades, Portfolio), who has 21,618,548 shares. Mason Hawkins (Trades, Portfolio) follows him, reporting 17,272,498 shares of the company held.
Richard Pzena (Trades, Portfolio) shareholding history:
News Corp was formerly the publishing business of the now 21st Century Fox (FOXA, Financial) until June 28, 2013, and is the owner of the Wall Street Journal, New York Post and HarperCollins book publishers, among others. Its share price has risen almost 12% since the spin-off.
In fiscal 2013, the company reported $8.89 billion in revenue, $506 million in net income, and $169 million free cash flow. It also achieved a 4.03% return on equity, 39.04% gross margin, and has $2.38 billion in cash.
News Corp has a P/B ratio of 0.8 and P/S ratio of 1.18.
Allegion Plc (ALLE, Financial)
As of March 31, 2014, there are 14 gurus holding this company. The largest position was taken by John Griffin (Trades, Portfolio), who owns 4.42 million shares. The second largest belongs to Eric Mindich (Trades, Portfolio), who owns 1.7 million shares.
John Griffin (Trades, Portfolio)’s holding history:
Allegion, which makes residential security products and solutions, is the spin-off of Ingersoll Rand (IR, Financial), which took place Dec. 2, 2013. Ingersoll Rand shareholders received one share of Allegion for every share of the company they held.
Since the spin-off, Allegion shares have gained 29.95%, outperforming the S&P 500 by 21.77% in the same period.
In 2013 Allegion reported $2.09 billion in revenue, $31 million in net income and $204 million in free cash flow. Its cash stands at $227 million and its gross margin was 41.06%.
Allegion also has a P/E of 111.9, which is near a one-year high. Its P/S ratio is 2.5.
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