Be Ready When This Tech Spin-Off Hits Wall Street

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Most investors don't think of Rayonier Inc. (NYSE: RYN) as a high-tech firm.

This 85-year-old forest products company operates as a Real Estate Investment Trust (REIT) after being first acquired, then later spun off, by ITT Corp. (NYSE: ITT).

It owns some 2.7 million acres of timberland and is one of the largest landowners in the U.S. and New Zealand.

That sounds like a pretty low-tech operation - turning forest lands into lumber, pulp, and paper products.

And there's our opportunity...

Hidden below the surface is a tech-oriented performance fiber division that can offer investors superior returns and is soon to be spun off.

While that deal's developing, I'll show you first why it's going to be a huge winner.

And then how to profit now from some of the best tech spin-offs out there...

Beat the S&P 500... By Nearly Half

Rayonier's yet-to-be named spin-off will make products for the pharmaceutical industry as well as specialty coatings used throughout the tech and industrial sectors.

More to the point, the fiber unit transforms simple wood chips into high-value cellulose fibers used in the manufacture of flat panel televisions, computer screens, and smartphones.

Rayonier has found a way to unlock the division's hidden value when it made the decision to spin off the fiber division as its own independent company.

The structure of this spin-off shows just why these transactions can be so profitable for investors.

Rayonier's existing shareholders will get stock in the new independent firm at no cost to them. In other words, buy one stock and invest in another one for free - all without a bill from the tax collectors.

And history shows that's just the beginning of the profit stream...

Lehman Bros. studied the subject extensively and found that investors in these kinds of deal gain windfall profits. The former Wall Street giant studied 85 spin-offs between 2000 and 2005 and found that they beat the S&P 500 by as much as 45% in their first two years as independent companies.

Of course, some may think that's a biased study designed to attract investors to new issues the firm is underwriting. But academics have come to similar conclusions.

Consider that two professors at Penn State University examined 30 years of market data covering 174 spin-offs. Their study revealed that in the first three years of operations, these new companies showed price appreciations of 76%, beating the S&P 500 by 31%.

Whether the teams from Lehman Bros. or Penn State have the best profit data is beside the point. Both studies prove conclusively that spin-offs can absolutely crush the overall market's returns.

Spin-Offs: The Ultimate "Two for One" Deal

Now then, as much as we like the potential in the Raytheon spin-off, there's a play that gives investors the opportunity to invest in more than 30 of the best spin-offs.

The Guggenheim Spin-Off ETF (NYSE Arca: CSD) specializes in just these kinds of deals. Strictly speaking, it's not only focused on technology firms.

Instead, CSD invests in technology as well as a broad array of sectors such as energy, restaurants, and entertainment.

But it includes three spin-off firms in particular that will help this ETF well outperform the overall market's returns.

Exelis Inc. (NYSE: XLS) is a leader in military technology covering everything from surveillance to communications to advanced materials.

For instance, it has 40 years' experience building lightweight composite assemblies used in military airplanes and helicopters. Exelis also makes night vision goggles that provide voice and data communications in a secure format.

Then there's the Signal Sentry 1000, a system that stops intruders from jamming Global Positioning Systems communications needed for guidance systems. The system can locate with pin-point accuracy the sources of interference, ensuring safety and efficiency in taking care of this threat.

The company became a stand-alone unit back in back in January 2011 when it was also spun off from ITT Corp. The stock debuted in December of that year.

And the spin-offs from the old ITT unit aren't quite done yet. Exelis itself plans to spin-off part of its Information and Technical Services segment into an independent unit by the summer of this year in a tax-free transaction.

For its part, CSD also is tapping into the biotech boom. The second firm that it holds and we like is Prothena Corporation PLC (Nasdaq: PRTA), a clinical-stage biotechnology firm focused on Parkinson's disease and other neurodegenerative disorders.

The company specializes in making antibodies that target proteins that are improperly folded or cells that cause disease because they lack the correct adhesion properties.

Prothena's pipeline also includes discovery-stage programs that ultimately may offer treatments for Alzheimer's disease and type 2 diabetes.

In December, Prothena signed a deal with drug giant Roche Holding AG (OTC: RHHBY) to develop and commercialize Parkinson's treatments that could be worth up to $600 million.

But Prothena has followed a circuitous route to achieve its current success.

Elan Corporation acquired the forerunner of the firm back in 1996.

Elan went through a de-merger of its discovery and early development efforts in December 2012, and Prothena was born. Since shares began trading at that time, they are up more than 270%.

CSD also holds shares in a stock that has prospered after being spun off from troubled Tyco.

No doubt, The ADT Corp. (NYSE: ADT) is best known as a leading home security firm. But in reality, it offers much more than that.

Its advanced sensor technology also is making ADT's home automation an integral part of the company's services that play off the mobile revolution.

Home automation allows users to lock and unlock their doors as well as control their lights and media centers from either a smartphone or tablet - or both.

Though the firm is becoming more tech-focused, there's just no denying ADT's strength in home and small-business security. With a total of 6.5 million clients, ADT has a 25% share of the $11 billion residential market.

The firm also ranks first in serving small businesses. ADT has a 13% share of a market worth $2.4 billion. With 135 years in the field, the company responds to 19 million alarm signals each year and has annual sales of $3.2 billion.

At the same, ADT does show the risks inherent in newly traded firms. When the firm missed guidance for its fiscal 2014 first quarter, the stock sold off, losing more than 20% over five sessions.

That's one of the reasons why we think average investors ought to consider CSD as a great proxy for the whole space.

The ETF itself is up some 79% over the past two years. That's more than double the S&P 500's roughly 36% return over the period. Not bad for an investment vehicle that costs just $43 a share.

CSD is an ETF that has winner written all over it. It provides a profitable combination of recent spin-offs, broad economic exposure, and access to some great tech stocks.

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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