Spin-offs notably slowed in the first eight months of 2016 compared to the same period last year. But the new independent companies to emerge are outperforming last year’s batch.
In 2016 so far, 18 independently traded companies have formed through being spun off from larger parents. Year to date, the stock prices of only six (33%) declined, while the rest gained. Last year, 25 new spin-offs began trading. Of these, the stock prices of 13 (52%) have declined, while the rest gained.
The average gains of the spin-offs of 2016 also outperformed the 2015 group by a wide margin. Spun-off companies in 2016 have returned an average of 13.1% year to date, compared to a just 2.02% return for the 2015 group from their spin-off to date, and a 4.7% rise in the S&P 500.
Spin-offs often provide profitable trading opportunities. Investors in spin-off companies in 2016 would have made a significantly greater amount of money on some companies than others though. Spin-offs are notoriously hit-or-miss and can disappoint. Overall, they have proved a solid investment.
According to research by GuruFocus data analyst Vera Yuan, spin-offs outperformed the S&P 500 if held for longer than one month. The group of almost all spin-offs that happened after Jan. 1, 2009 and June 4, 2014, surpassed the S&P 500 Index by an average of 25% in the first year of trading, and beat the market more over time. Fifty-two weeks after being spun off, the spin-offs outperformed the market by 84.28%. Therefore, investing $1,000 in spin-offs and holding for one year would generate $842.80 more than investing $1,000 in the SPY.
“Spin-offs outperform for a few reasons,” Yuan wrote. “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.”
Another source offers similar results for more recent years. The Beacon Spin-Off Index (AMEX:CLRSO) lists up to 40 of the highest-ranking stocks of all spun-off companies in a two-year period beginning 30 months prior to reconstitution and ending 6 months prior to reconstitution. Over the past five years, the Beacon Spin-Off Index returned a cumulative 88.62%, beating the 75.5% advance of the S&P 500.
This year’s best performers were both chemicals companies. Specialty chemicals maker Ingevity Corp. (NGVT, Financial), a spin-off of corrugated paper company WestRock Co. (WRK, Financial), has gained 60%. The second stock, GCP Applied Technologies (GCP, Financial), the construction chemicals and building materials branch of WR Grace & Co. (GRA, Financial), a chemicals and specialty materials company, gained 58.58%.
The worst performing spin-off stocks of 2016 were both in health care. OncoCyte Corp. (OCX, Financial), a former liquid biopsy cancer diagnostics segment of BioTime Inc. (BTX), which focuses on embryonic stem cell research, plunged 55.33%. Close behind, Quorum Health Corp. (QHC, Financial), an owner of acute care hospitals and outpatient services that spun off from Community Health Systems (CYH, Financial), an owner of acute care hospitals, fell 51.91%.
Last year’s returns among spin-offs were similarly disparate. Leading returns were FirstService Corp. (FSV, Financial), a spin-off of Colliers International, which gained 65.46%, followed by Remy International (REMY, Financial), a spin-off of Fidelity National, up 47.55%.
On the opposite end of the scale, SeaSpine Holding (SPNE, Financial), a spin-off of Integra Lifesciences Holdings (IART, Financial), tumbled 46.87%, followed closely by LiLAC Group (LILA), a spin-off of Liberty Global Group (LBTYA), which fell 41.79%.
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