Stocks to Watch: 18 Spin-Offs to Look for in 2014

This year's white-hot deal-making has put a lot of companies on our stocks to watch list. Amid global takeover activity that's up 53% year over year, and a burst of tax inversion deals, spin-off action has been somewhat overshadowed.

Stocks to Watch: Spin-Offs

However, a flurry of spin-off announcements have come over the last several months amid worries of rising interest rates. Indeed, 28 spin-offs were completed in the first six months of 2014, up from 18 in the same period a year ago, Joe Cornell, head of Spin-Off Advisors, told Barron's.

In completing a spin-off, a parent company must frequently float bonds to reapportion debt between the parent company and its "offspring." Sometimes, the parent company is also obligated to fund a one-time dividend from the spin-off to the parent company, Barron's explained.

Cornell expects 2014's second half to be equally as brisk as the first, with this year's spin-off total estimated at 57. That would be handily above the 37 in all of 2013 and would also mark the most spin-offs completed since 2000, when there were 66.

For investors, this means profit opportunity ahead…

Investing in Spin-Offs

Several studies show that spin-off companies tend to outperform their parent companies as well as the broader stock market.

For example, a 25-year Penn State study showed that stocks of spin-off companies outperformed industry peers and the S&P 500 Index by about 10% per year. And a JPMorgan study revealed that spin-offs beat the stock market by more than 20% on average during the first 18 months after the transaction.

Spin-off shares tend to be inexpensive right out of the gate for several reasons. First, investors frequently sell when they receive stock in the new company – one they never intended to own. Second, spin-offs are dumped by index funds when the new company isn't part of the underlying index. And finally, institutional fund managers are quick to sell spun-off shares due to their lack of liquidity or dividend.

Yet providing a cushion to the spin-off stock prices are insiders who often receive generous incentives to make the spin-offs work. Plus, management of the newly separated company is keen on finding ways to boost shareholder value.

That's why we're putting the following expected spin-offs on our stocks to watch list.

Join the conversation. Click here to jump to comments…

Leave a Reply

Your email address will not be published. Required fields are marked *

4 − one =

Some HTML is OK

© 2015 Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201, Email: