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Non-Tech : SPIN-OFFS "secret hiding places of stock market profits" -- Ignore unavailable to you. Want to Upgrade?

To: Bob Rudd who wrote (319)	6/28/1999 8:02:00 PM
From: Stewart Whitman	Read Replies (1) \| Respond to of 1185

Bob, The easiest way for me to answer this is to point to the numerous studies that have been done by investment pro.'s already. Some of the key points found in the studies are as follows: - initially a spin-off underperforms the market, dropping 10%-15% more than the market over its first few month of trading (a 1989 study by Seifert & Brown and a 1993 study by Cusatis, Miles, & Brown). - initial underperformance is caused by holder's of the parent stock exiting the spin-off for a variety of reasons - capitalization rules, S&P index rules, different industries, growth vs. value, etc. (a 1980 study by Brown & Harlow). - spin-offs outperform the S&P 500 and market peers over first three years of trading by about 10% (Cusatis, Miles, & Brown). - parent companies outperform their industry by more than 6% after spin-offs (Cusatis, Miles, & Brown). - spin-offs outperform IPOs (numerous studies) - over first three years of trading, spin-offs outperform IPOs by 30% (Cusatis, Miles, & Brown). Those are all historical studies - there is no guarantee that the conditions still occur. In my relatively short experience (3 years following spin-offs vs. 20+ years used in some of the studies), the initial underperformance of spin-offs over the first several month of trading still occurs. In fact, the short term underperformance may be even more exaggerated today when certain "prevailing" conditions occur (index vs. non-index companies, growth vs. value). Using the initial underperformance is still the most straight forward way to take advantage of spin-off performance. My preferred approach is to work on a valuation for an attractive spin-off, buy the spin-off at an attractive valuation within a month or two after the spin-off, and then hold the spin-off for a number of years. Secondly, I'll look at buying before the spin-off when I expect some fundamental valuation changes to occur because of the spin-off. Finally, I'll look for shorter term opportunities in arbitrage of publicly-traded spin-offs based on valuation metrics (i.e. companies that have been partially spun-off already and a full spin-off is expected). Regards, Stew