Joel Greenblatt (Trades, Portfolio)'s "You Can Be a Stock Market Genius" prompted many investors to follow spinoff stocks with close attention. Gurus like Peter Lynch, Charlie Munger (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) do as well.
Spinoff stocks, which are created after a company decides to split off a business segment into an independently traded venture, have been producing impressive returns for decades. Credit Suisse (CS, Financial) found that spinoffs have historically beaten the S&P 500 (SPY, Financial) by more than 10% per year.
Just be careful. Following the separation, many spinoff stocks are sold off quickly, as investors in the parent company look to dump the smaller stock that typically doesnt align with their original investment thesis.
Unlike most other securities, when shares of a spinoff are being dumped on the market, it is not because the sellers know more than the buyers, said Seth Klarman (Trades, Portfolio). In fact, it is fairly clear that they know a lot less.
If youre looking for the next profitable spinoff stock, start with the three on this list.
Cyclerion Therapeutics Inc (CYCN)
Its parent company, Ironwood, is more than four times the size of Cyclerion. Many funds likely cant hold stocks as small as Cyclerion, which is under a $500 million market cap. This has almost certainly caused forced selling.
Additionally, both retail and institutional investors likely purchased Ironwood stock for its primary drug candidates. Cyclerion holds more niche assets that likely werent a major part of their investment thesis.
Notably, after receiving roughly 50,000 shares after the spinoff, its president, Mark Currie, acquired an additional 270,000 shares using his own money. The $4 million purchase was executed at around $15 per share.
As a small-cap biotech stock, theres a lot to unpack here, but there are plenty of signs that Cyclerion could be grossly undervalued.
Fox Corp. stock now trades at just 20 times trailing earnings. Using consensus estimates, shares trade at only 14 times forward earnings. The free cash flow yield is close to 9%.
Disneys $236 billion market cap trumps Foxs $22 billion valuation many times over. Investors also received shares in this new entity post-spin regardless of whether they were interested in the assets.
This could be your chance to follow one of Klarmans biggest bets.
Yet again, parent company Autoliv ($5.6 billion market cap) heavily outweighed the size of Veoneer ($1.5 billion). Additionally, Veoneer is hyper-specialized on an opportunity that could take decades to unfold: autonomous vehicles.
Traction is slow, but Veoneer is starting to capitalize on the self-driving mega-trend.
For example, in January, it secured a contract with a global automaker to design and manufacture lidar systems for autonomous vehicles. Lidar systems are critical to self-driving capabilities, as they classify objects and detect lanes to accurately position the vehicle.
"As a pure play on the active safety and automated driving market, VNE stands to benefit from inflecting take rates in global ADAS (arguably one of the most attractive secular trends in autos today - the growing adoption of advanced driver assistance systems and automated driving), increasing active safety content-per-vehicle and some recaptured market share lost due to its strategic decision to develop vision software internally. Layering added growth from the growing next-gen brake systems market, we forecast 2017-2025 revenue CAGR of 12% with margins to expand as new business revenue materializes and VNE shifts to a software + hardware revenue model."
This story will take years to play out, but the post-spin selloff has provided a discounted way to play the rise of autonomous driving.
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