Tuesday, December 20, 2011

Diary: spinoffs

Sketch notes on a webpage discussing spinoffs.

3 periods when an investor can get involved:
  1. pre-spin period - spinoff is announced. The decision to buy stock in the corporate parent may be desirable if it enables the investor to purchase both entities at a lower combined price that the two separate post-spin companies.  But, this can be difficult without definitive knowledge of the spin-off’s balance sheet, asset base and normalized earnings power.    Typically, the market reacts positively to announcements of spin-offs.  Often there will be an initial jolt to the price of the stock, as investors anticipate increased operating efficiencies that are consistent with these transactions. As the initial euphoria subsides, the stock often settles into a narrow trading range until the actual spin-off takes place.  This can be as long as a year or more. This can be an attractive time to get involved with the spin-off if one is patient, and believes both parts are attractive investments. 
  2. initial trading period -  spinoffs often drop initially. those who are adept traders may wish to consider selling (the spinoff) as soon as possible (assuming you hold), then repurchase the shares as the selling subsides.
  3. seasoning periodThe seasoning period starts from the moment the spin-off is announced and can last up to several years.  The better the spin-off is understood and perceived the faster the seasoning period. During this time more information becomes available, management tells its story to Wall Street, and more realistic appraisals of the company’s prospects can be made.  Depending on how much structural selling the spin-off endured, this period can have the greatest mispricing of a given stock as well as the best opportunity to profit from that market inefficiency.  One must be patient and selective when sorting out attractive spin-offs. 

buying most spinoffs in the early weeks of trading due to the intensity of artificual selling pressure was generally the best strategy. "Now" (2000 - when there were lots of spinoffs), much greater discernment required

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