Historically, spin-off stocks have out performed the rest of the stock market by a pretty significant margin. Since these spin-off stocks provide such a tremendous opportunity, let’s take a look at how to find these great opportunities.
Why do Spin-Off Stocks Out Perform the Market?
Before we look at how to find profitable opportunities let’s look at why they are such good places to start your investment research.
Spin-off stocks are stocks that are spun out or divested from their parent company. This usually happens because of several reasons:
- They are a very small division in comparison to the parent company.
- They are an un-related division in comparison to the parent company.
- They have a lot of problems and the management wants to focus on their core operations.
- They are small but fast growing in comparison to the parent company and the company doesn’t feel they are being valued for their potential so they spin-off the company so it can attract growth investors.
- The division is in an ugly industry or has potential liabilities.
There are many reasons to spin-off a division or product line so this gives us plenty of opportunities for investment.
Where to Find Spin-Off Opportunities?
The first place to look is at the Securities and Exchange Commission website for electronic company filings. The name of this database is called EDGAR.
Any company that is proposing to engage in a spin-off transaction must file a Form 10 with the Securities and Exchange Commission. The form that relates to these transactions is a 12B. So the full report will be a Form 10-12B. This is the initial filing that the parent company will file.
As the spin-off transaction comes closer to fruition, the company will file amendments to the original Form 10-12B as more details are known. These amended filings are called a Form 10-12B/A.
What to Look for in the Spin-Off Filings
Once you find the list of filings you now have a list of potentially profitable opportunities for investment.
As you read through the filing you will be looking for several things:
- The new managements plans and forecast for the new company.
- Who the new management will be. (Hint: If the CEO of the parent company is going to follow the spin-off company, this may be a great opportunity, because why else would they leave a larger company for a smaller company)
- Pro Forma Financials (These are the financial statements of what the company would have looked like over the previous few years had they already been a stand alone company.)
This should be a great start for you to find many profitable spin-off stock opportunities.