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How to Invest in Spin Offs

Original post by Slav Fedorov of Demand Media

A spinoff is a subsidiary that a parent company segregates into a new entity and spins off to the parent company’s shareholders by distributing the company’s stock to them. The existing shareholders are then free to sell their spinoff shares on the open market. Many spinoff stocks have performed better than those of the parent companies for several reasons. Buying a spinoff is no different from buying any other stock: the bulk of your effort should go into research prior to making the purchase.

Step 1

Follow company financial news on Yahoo! Finance, Reuters, Briefing.com or other similar sites. A company can announce a spinoff at any time, but there is no one place online dedicated to such announcements. A spinoff by a large company often makes the financial news headlines and is easy to spot.

Step 2

Study the spinoff announcement and related documents filed with the Securities and Exchange Commission (SEC). It is important to understand the reason for a spinoff and what exactly is being segregated into a new company. A company that is spinning off an unprofitable subsidiary to improve its own numbers is different from a company that is seeking to increase shareholder value by spinning off a fast-growing unit whose stock is expected to do well.

Step 3

Try to obtain financial results for the spinoff. This information is not always readily available, but is often provided as part of SEC spinoff filings on a pro forma basis, meaning the hypothetical results of the spinoff if it had been a standalone company in the immediately preceding period.

Step 4

Analyze the spinoff’s pro forma financial results to see if its fundamentals are strong enough to warrant a purchase.

Step 5

Watch how spinoff shares open for trading and use the new stock data to ascertain the market value of the new company.

Step 6

Buy the spinoff if its price begins to advance. Alternatively, you could watch the stock while it builds its first base and buy it on a breakout.

                   

Tips & Warnings

  • Even if you are right in your value calculations, it is safer to wait for the market to confirm them -- that is, to see if the stock advances in price. Knowing that you were right in uncovering great value is of little consolation when the stock you bought tanks.
  • Learn to use technical analysis to buy spinoffs on the breakout from the first base.

Resources

References

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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