I've always been a big fan of what are known as spin-off deals because they unlock a lot of hidden value - and give shrewd investors market-beating gains.
Take Eaton Corp. PLC (NYSE:ETN), which is looking for a way to do all it can to brighten its business - and shareholder returns.
That's why the global leader in power management technologies announced it is spinning off its LED lighting business.
The move is designed to allow Eaton to focus on its core technologies, while the lighting unit can focus more heavily on a market forecast to be worth $45 billion by the end of 2023.
By doing so, Eaton is keeping the bulk of its more than $23 billion in global sales in-house, while shedding an operation that, last year, had sales of more than $1.8 billion.
I believe this is a great move for the company and its investors.
And today, I'm going to reveal a little-known way to play this highly lucrative trend in spin-offs...
Spin-offs in the M&A Market
Actually, Eaton's move is a foray into a big trend that doesn't get much attention from the nation's financial media. That's ironic since there seems to be a major spin-off announced just about every week.
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Dealogic has estimated the movement toward companies shedding part of their businesses as being worth $1.6 trillion. For the last several years, the firm notes, spin-offs have remained a very active part of the overall M&A market.
For instance, Novartis AG (NYSE:NVS) is expected to complete the spin-off of its eye care business Alcon, which had 2018 sales of $7.1 billion, in the next few weeks.
And in late February, General Electric Co. (NYSE:GE) completed the $2.9 billion spin-off of its transportation unit. Just three weeks before that, medical distributor Henry Schein Inc. (Nasdaq: HSIC) shed its animal health business and completed a merger to create Covetrus Inc. (Nasdaq:CVET) in a deal valued at up to $1.2 billion.
History shows that these kinds of deals can be very lucrative for investors.
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%.
There's just one problem. By definition, most investors can't cash in, unless they are lucky enough to own stock in a firm that decides to ride this trend.
But I have uncovered a way that you can take advantage of the growing market for spin-offs right now, with an investment that has beaten the by more than 33% since the S&P 500 rebounded from its recent lows on Dec. 24.
An ETF to Play the Spin-off Market
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The Guggenheim Spin-Off (NYSE:CSD) is an ETF that specializes in just these kinds of deals. Although information technology and health care account for one-fourth of the fund's holdings, strictly speaking this is not a pure play on tech spin-offs.
Instead, CSD invests in a broad array of sectors such as energy, restaurants, and entertainment. I think that's a good thing because it allows us to cash in on tech deals, while also getting broad diversification.
CSD owns a broad range of spun-off firms. Online payments giant PayPal Holdings Inc. (Nasdaq:PYPL), which is the fund's top holding, is a great example of how we can profit.
Shares of PayPal were spun-off from eBay Inc. (NYSE:EBAY) in July 2015. By the time the spin-off took place, many wondered if PayPal's best days had passed.
Yet once the firm was run by a standalone management team, PayPal has been acting more like a tech industry upstart. Sales have been growing at a nearly 20% clip and should surpass $20 billion next year. That's more than double the sales base that was in place prior to the spin-off.
Or consider the case of Lamb Weston Holdings Inc. (NYSE:LW). This firm is one of the most technically advanced food processors in the world and is a top five holding in the CSD fund.
This was once a division of Conagra Brands Inc. (NYSE:CAG) and suffered from weak profit margins. With more focused management costs have been tightened, helping to boost adjusted earnings from $373 million in 2016 to $580 million last year.
And management keeps finding ways to squeeze out more profits. Adjusted earnings should grow 50% faster than sales this year, according to Merrill Lynch.
The former Hewlett Packard Co. is another great example of a company that can benefit from being broken up, and is CSD second-largest holding. The Silicon Valley giant was once a major tech leader but by the middle of this decade had become a lumbering laggard.
Hewlett Packard Enterprise Co. (NYSE:HPE) is now focused on helping large organized migrate to the cloud and mobile platforms. It is showing great signs of growth once again - it recently said fourth quarter operating income doubled from the year before and raised guidance for 2019.
A Proven Track Record
There's no doubt that spun-off firms can take a much bolder approach to boosting sales and squeezing out profits. That's the payoff from a dedicated set of leadership in place.
Prior to spin-offs, such firms are often led by division heads that simply don't want to take chances.
Here's the thing. The impressive track record for spin-offs has gotten the attention of corporate boards. Many of them are looking at which of their own divisions may be strong candidates for a spin-off.
And that means the Guggenheim Spin-Off ETF will have ample buying opportunities to come. This fund is already handily beating the S&P 500 this year, and also has a superior track record over the past decade.
I'm looking for more outperformance in the years to come for this dynamic ETF.
Spin-offs aren't the only way to play the tech market - finding a strong tech leader, developing cutting-edge technology can also lead to market-crushing gains.
Just look at the companies that are at the helm of 5G networking.
They've set themselves up to see major windfalls in mere months, simply because they've tapped into technology that other firms don't know about - and by the time they find out, they'll already be behind the curve, meaning the profit potential would have been swallowed up already.
You see, 5G is going to be absolutely revolutionary. It's paving the way for Edge Computing and the Internet of Things (IoT), and as a Strategic Tech Investor subscriber, you have a chance to get in on the ground floor, meaning you'll see the biggest returns from the best companies.
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The post How to Play the $45 Billion Market the Media Isn't Talking About appeared first on Strategic Tech Investor | Michael A. Robinson.
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About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
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