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Speculative Spin-Offs: Overview

Current Holdings
 

(Performance Data)

While combing through the universe of spin-off stocks to find the best candidates to include in our Primary Stock Portfolio, we pass on stocks for a variety of reasons. But we noticed that one type of spin-off tends to either soar or crash in spectacular fashion. Since 2002, we have classified these spin-offs as "speculative spin-offs" and they have gained an average of 47.9% per year, albeit with excess volatility. Due to their potential for extreme risk and volatility, we cannot recommend this category of spin-offs, but will now publish them for aggressive investors with a higher risk tolerance to consider on their own. Please note that the number of speculative spin-offs may not be very high at times.

Annual return of spin-off stocks

For example EnPro Industries Inc. (NPO) was spun off from Goodrich several years ago, and with negative earnings and the specter of asbestos litigation hanging over the company, EnPro's stock price fell 66% during the five months following its separation from Goodrich. We labeled the company as too risky to recommend in February of 2003. Over the next three years, EnPro's stock recovered and gained 632%.

CenterPoint Energy spun off Texas Genco. Similar to EnPro, Texas Genco also had negative earnings. In addition, the company had seen its revenues fall by 55%. Therefore we categorized the spin-off as too risky in 2003. Texas Genco then went on to surprise many when its stock rose 229.5% over the next twenty-two months. The company was eventually bought out by GC Power Acquisition for $3.65 billion.

Monsanto Co. (MON) was spun off by Pharmacia Corp. and in 2002 we labeled the company as too risky, due in part to negative earnings, a negative net profit margin, and falling analyst ratings. Over the next three years, Monsanto's stock rose 334.3%. It's almost as if the more dire the outlook, the better some spin-offs perform.

However, not all of these speculative spin-offs succeed. In 2004 we categorized Washtenaw Group (TWH) as too risky because we believed its mortgage business would go south. It did and the company applied for delisting from the American Stock Exchange nearly two years later. Washtenaw's demise didn't occur overnight; if the company's shareholders had used stop-loss orders, they would have missed a large part of the damage. Fortunately, we never recommended the company due to its extreme risk.

As we mentioned above, we reject spin-offs for a variety of reasons, but those that we reject due to extreme risk often seem destined to either be a home run, or a strikeout. For experienced, aggressive investors who want to know about the handful of stocks that occasionally end up being categorized as "speculative spin-offs," we will now list the stocks here and will remove them when they reach a selling point.

Once again, please note we are not recommending the purchase of these stocks due to their extreme risk and the number of speculative spin-offs may not be very high at times. We are merely mentioning them for experienced, aggressive investors who are willing to do their own due diligence to find opportunities to occasionally swing for the fences, despite the perceived high risk.

Performance of Speculative Spin-offs

Average Annual Return Since Start of Tracking1
   
Speculative Spinoffs:
47.9%
S&P 500:
7.6%

1Tracking started on October 14, 2002. Data last updated onDecember 15, 2017.

 

 

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