According to Investopedia, a spin-off is “the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. A spinoff is a type of divestiture. Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.”
You can see our newly added Spin-Off Stock List from GuruFocus.com. It contains all the spin-offs that happened since 2013. According to Joel Greenblatt (Trades, Portfolio) and plenty of studies, investors earn an above-normal rate of return by investing in recently spun-off subsidiaries. One of the more commonly cited studies by Patrick Cusatis, James Miles and J. Randall Woolridge was published in a 1993 issue of The Journal of Financial Economics. It determined that spin-offs and parents surpassed the S&P 500 Index by an average of 30% and 18%, respectively, during the first three years of trading in spin-off shares. Is it true? Can we beat the market if we buy shares right after a spin-off?
Methodology and Facts
1. We tracked almost all spin-offs that happened after Jan. 1, 2009 based on the data we had.
2. We calculated the one-week return of the share after the spin-off happened and calculated the SPDR S&P 500 ETF (SPY, Financial) one-week return started at the same date of the spin-off. Deducting the SPY return from the share return, we got the return which the shares outperformed the market in a one-week time frame. We calculated the outperformance for all spin-offs and found the median of the data.
3. We did the similar steps to calculate the share outperformance return data for two weeks to 52 weeks after each spin-off and got medians of the share outperformance data for all time frames.
4. All the prices we used in this research were split-adjusted and dividend-adjusted.
5. We ignored the shares which had already been acquired.
Data and Results
For some of the shares, they did not have a history long enough to calculate the 52-week returns. For example, the ex-date for Navient Corp (NAVI) is May 1, 2014. Therefore, we only counted this company when we calculated the share outperformance return for one week, two weeks and three weeks. Because of this issue, we had 72 companies available when we calculated the median of the outperformance return for one week. We had 62 companies available when we calculated the median of the outperformance return for 26 weeks and we had 51 companies available when we calculated the median of the outperformance return for 52 weeks.
The following table 1 shows the medians and average of the outperformance returns, as well as numbers of companies available for 52 time frames.
Source: Database of GuruFocus.com, LLC
From Table 1, we can see there are 71 companies available to calculate returns four weeks after spin-offs. Among all these 71 companies, the median of the four-week outperformance return was -0.3%, which means spin-offs underperformed the market by 0.3% four weeks after they were spun off. The average of the four-week outperformance return was 5.27%, which means that spin-offs on average outperformed the market by 5.27% four weeks after being spun off.
Table 2 shows the number of companies with positive outperformance returns as well as the percentage of companies with positive outperformance returns for 52 time frames.
Source: Database of GuruFocus.com, LLC
From table 2, we can see that more than 50% of companies outperformed the S&P 500 after four weeks following their spin off. Most companies underperformed the S&P 500 for the first two weeks after the spin off.
We plotted the median outperformance returns against the weeks to get chart 1.
From chart 1, it was clear that generally within one month after the spin-off, the spin-offs underperformed the market. Then it started to outperform the market little by little. Forty-three weeks after being spun off, the spin-offs outperformed the market by 11.3%, which is the highest peak among the 52 weeks after the spin-off. It means that if we invested $1,000 in spin-offs and held them for 43 weeks, usually it would generate $113 more than if we invested $1,000 in the SPY.
Attention: This conclusion is not obtained for exactly one stock. This 11.3% is the median outperformance return for 55 companies. There was a huge drop in the outperformance return after 43 weeks. Forty-seven weeks after being spun off, the spin-offs outperformed the market only by 3.13%. Then the outperformance return began to increase again. If we invested $1,000 in spin-offs and held them for one year, usually it would generate $90.9 more than if we invested $1000 in SPY.
We plotted the average outperformance returns against the weeks to get chart 2.
From chart 2, it was obvious that the spin-offs outperformed the market in all time frames. It shows that spin-offs surpassed the S&P 500 Index by an average of 25% during the first year of trading in spin-off shares. The longer we held the spin-offs, the more we could beat the market. Fifty-two weeks after being spun off, the spin-offs on averagely outperformed the market by 84.28%, which means if we invested $1,000 in spin-offs and held them for one year, usually it would generate $842.8 more than if we invested $1,000 in SPY.
We plotted the outperformance returns against the weeks for each spin-off to get chart 3.
From chart 3, we can see 52 weeks of spin off, Altisource Asset Management Corporation (AAMC) outperformed the S&P 500 by 3,308%. The share price was around $30 when spun off. Now the share price is nearly $1,000.
Chart 4 shows each spinoff’s outperformance return for three months, six months, nine months and 12 months.
After Altisource Asset Management Corporation (AAMC), we plotted the outperformance returns against the weeks for other spin-offs to get chart 5 and plotted each spin-off’s outperformance return for three months, six months, nine months and 12 months to get chart 6.
Even ruling out the extreme change of Altisource Asset Management Corporation (AAMC), we can still see that most spin-offs outperformed the market a lot since spun off.
Conclusion
Generally speaking, spin-offs outperform the S&P 500 if you hold them more than one month. Please go to the List of Spin-Off Stocks to see the whole list of spin-offs since 2013. Spin-offs outperform for a few reasons. For shareholders it would be better to separate the old dividend business and the high-growth business. Investors tend to invest in more focused and pure-play companies. Management teams at the spin-offs have greater incentive to produce, due to stock options and stock holdings, and greater freedom to start new ventures, rationalize operations and trim overhead. Just be careful, spin-offs are more volatile.
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