You Can Be a Stock Market Genius was written in 1999 by Joel Greenblatt and is still the best book ever written on investing especially for spin-off stocks. While others may argue some other great books are better, I think no other book takes you off the beaten path to show you how to make money in the stock market in areas others leave behind.
You Can Be a Stock Market Genius Four Hidden Investment Ideas Highlighted by Spin-Off Stocks
Spin-off stocks are stocks that are shares of the new company are distributed to existing shareholders. Usually it is a smaller division, a capital intensive division, an unrelated division, or otherwise not a good fit for the company as a whole.
Spin-off transactions typically occur when the company feels that the sum of the parts is greater than the whole. If an insurance company owns a candy store it would make sense for the insurance company to spin-off the candy store. That way, both management teams can spend their focus and energy on their core business and not have to worry about issues relating to other industries.
Since these spin-off stocks are not wildly popular the existing shareholders who receive them tend to just get rid of them and sell indiscriminately. This can often times lead to opportunities for the average investor. As the shares get sold for really no reason the stock gets cheaper.
This is a main reason that stocks in spin-off companies have out performed the stock market by a historically large margin. If you are a small investor looking for an edge, spin-off stocks is the first place to look.
Risk Arbitrage & Merger Securities
Risk arbitrage opportunities result from narrow spread when takeovers have been announce. Often times the stock will trade below the takeover price because it wonât take place for a few months. It happens basically because of the time value of money. Once in awhile the spread, while small, will work out to a very acceptable annualized rate.
With all the electronic information out there, you often times will not find many opportunities other than when the risk of the merger not going through is high. There is too much money out there chasing out performance that there isnât room for the average investor in this area unless it is in a very small company.
Prior to all the easily available money on Wall Street, merger securities used to be used during mergers in order to spice up the offer. However they are rarely used today.
Bankruptcy & Restructuring
A company coming out of bankruptcy is a good place for the small investor to find opportunities. Wall Street investors tend to shun these companies because most likely they owned them as they went into bankruptcy and donât want anything to do with them anymore.
This is a good place to look because you can sometimes find a good company that is profitable but it just got taken down because it had too heavy of a debt burden. Now that the debt has been reorganized into equity, those former bondholders usually donât want the stock they just want their money back.
As in the case with spin-off stocks they can sell indiscriminately and offer opportunities for the small investor to scoop up those shares on the cheap.
Restructuring often times can create opportunities when a company does something to adjust their capital structure. It could be the selling off of a division and then paying down debt or buying back stock. A company can really transform their earnings power by doing this. Even though Wall Street knows this they can often ignore it because it is happening to maybe a not so sexy company.
LEAPS are stock options for a company that is for out over a year sometimes two. Basically if you find a company whose fortunes are improving and you believe very strongly in their prospects you can buy an option for a couple years out as a way to control more shares for less money.
LEAPS are also a great way to add to your spin-off stock holdings. I recommend you understand stock options thoroughly before you try this.