Spin-off stocks are stocks of companies that are distributed to the existing shareholders of a company. 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 stocks are usually sold off by the shareholders who receive them.
If they are invested in a big manufacturing company for exposure to agriculture and the company does a spin-off of their candle company, it is highly likely that the investors in the agriculture company are going to get rid of their shares because they didn't buy the stock to won a candle maker! This can lead to profitable opportunities for the small investor.
Spin-Off Stocks â What to Look For
There are a few key things to look for when evaluating a spin-off stock:
Size of the Spin-Off
Often times the spin-off stock will be a fraction of the size of the parent company. This is where the greatest opportunity lies because the size of the spin-off company makes it impractical or even forbidden by the large institutional mangers to own so they sell it regardless of its investment merits.
There are two things to follow regarding the insiders of the company proposing the spin-off.
The first is who will be managing the spin-off. If the current CEO is going to follow the spin-off and become the CEO there, that is a clue that it could be a profitable opportunity. Why else would the CEO of a larger company want to become the CEO of a smaller company unless they thought there was tremendous opportunity?
The second thing to look for in a spin-off stock is insider ownership. Pay attention to how much stock the insiders are going to own either through purchases or incentive stock options. If the management is going to have their fortunes tied to the spin-off stock it is another good clue that this could be a good opportunity.
Often times the spin-off company will be given a clean slate of a balance sheet with no debt and plenty of cash. This will provide opportunities for growth or complimentary acquisitions.
On the flip side, many times a spin-off company will be ripe for takeover by another company. Before when they were the part of a larger company they weren't an acquisition target. Now that their business is focused on their core competency there may be potential suitors out there wanting to grow their market share.