I love corporate spin-offs – and you should, too.
With spin-offs, companies unlock hidden values in their operations and pass them on to shareholders – offering low risks and high probabilities of market-beating profits.
And the past month or so has produced a bonanza.
And most recently, security software maker Symantec Corp. (Nasdaq: SYMC) joined in and said it's splitting in two.
Overall, spin-offs are estimated to be worth $1.6 trillion so far this year.
Here's the hitch….
Breakin' Up Is Good for You
As promising as all that money sounds, most of these deals won't take effect until the second half of next year. But I've uncovered a way to take advantage of the growing market for spin-offs right now.
And we'll do it with a single investment that has beaten the market by 65% over the last two years.
I've been around high-tech investing for more than 30 years now, and I haven't seen this many spin-offs since 2000.
Spin-offs are not limited to high-tech, of course. However, of the roughly 30 major spin-offs in the works, 19 – or nearly two-thirds – are related to tech or the life sciences.
According to forecasting firm Dealogic, corporations have sold or spun off $1.6 trillion worth of subsidiaries and business lines globally so far this year. And by its measures, Dealogic says this is the most active the spin-off market has been since 2007.
I pay attention to spin-offs because I know just how lucrative they can be for tech investors. And the research backs me up.
For instance, a Lehman Bros. study found that spin-off companies beat the market by 40% in the first two years, while a Penn State University study found a three-year return of 76% – enough to beat the market by 31%.
In other words, spin-offs create "easy money."
Before we get to our own spin-off investment, let's take a look at this early fall's trio. We're already invested in a couple of them.
I first recommended eBay to Strategic Tech Investor readers in April 2013. And I agreed with activist investor Carl Icahn's quest to split up the online auction firm earlier this year.
The PayPal spin-off is going to be a major boon for eBay shareholders, who already saw their shares jump 7.5% on the news. The whole digital payments realm is finally opening up – the recently announced Apple Pay offering from Apple Inc. (Nasdaq: AAPL) and AliPay from Alibaba Group Holding Ltd. (NYSE: BABA) are two great new examples.
And PayPal, as the "growth" component of eBay, is poised to capitalize.
Sales at PayPal nearly tripled during the five-year stretch that ended in 2012, and the eBay unit now "facilitates" $1 of every $6 spent online. But PayPal is ready to leapfrog eBay's core "marketplace" business. In the calendar second quarter, PayPal sales jumped 20% to $1.95 billion, while eBay's mainstay business saw its revenue advance 9% to reach $2.17 billion.
Hewlett-Packard also has been a recommendation around here for a while. I first shared it with Strategic Tech Investor readers in July 2013, and it clobbered IBM Corp. (NYSE: IBM) in our "Clash of the Tech Titans" this past July.
And since then, HP shares have reached peak gains of 56.8%.
In the split, HP Inc. will devote its operations to PCs and printer sales. Hewlett-Packard Enterprise will serve large organizations by focusing on computer servers, data-storage equipment, software and consulting services.
HP said the change will allow the enterprise unit to focus on such growth areas as cloud computing and Big Data at a time when PC sales are week, declining 10% last year.
And at Symantec, one spin-off will focus on computer security, including the company's well-known Norton antivirus software. The other will specialize in information management, including backup and recovery, archiving and "eDiscovery."
For this deal, think of the security unit as the "parent company." Symantec said investors will receive shares in the information management unit as a special tax-free dividend.
The One Investment
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.