3 Stocks That Promise Big Payoffs – No Matter What the Market Does
If you're a big fan of two-for-one sales when you go out on your weekend shopping trips, then here is a strategy you need to consider.
This isn't one of those complex strategies entailing a lot of risk, or one that requires you to dig around in the nooks and crannies of the world's capital markets. The huge upside is well-known, and there's a long-and-proven record of market-beating returns.
And there's even a bonus: Because of the way Wall Street hamstrings itself, you can even force the institutional players to follow your lead.
Wall Street refers to them as "special-situation" investments.
Here at Money Map Press, we have a much simpler description.
We call them "easy money."
I'm talking about spin-off investing. Let's take a closer look.
As a group, spin-off investments offer some of the lowest risks and the highest probabilities of seeing market-beating profits.
Our own experiences here at Money Map Press underscore this – as do reams of market research.
Back in June 2012, we recommended that you pick up shares of Big Pharma player Abbott Laboratories Inc. (NYSE: ABT). Because the company was planning to split itself into two firms at the end of that year, investors who followed our recommendation would end up with two companies for the price of one.
And the two companies operating independently, we predicted, would deliver a much bigger profit punch than if they'd remained as one.
Here’s what we said at the time:
“By owning Abbott before the tax-free spin-off transaction takes place, you end up with shares in both companies. And a lot of research has found that – with the companies now liberated and nimble – the performance of the two stocks together flat-out crushes the market averages, especially in the first two years after the breakup.
“Abbott is an excellent candidate for such a strong showing.”
That's just how it worked out.
At the start of 2013, the spin-off broke the company into two businesses: Abbott, now a healthcare-products company, and AbbVie Inc. (NYSE: ABBV), a research-based pharmaceuticals firm whose drugs include the arthritis treatment HUMIRA.
The split resulted in some hefty gains for folks who followed our recommendations: Abbott gained as much as 40%, and despite a sell-off is still up 25%; and AbbVie's shares have zoomed 48%.
Gains of this magnitude are common with spin-offs, which is why we like them so much.
And spin-off plays also often pay dividends. AbbVie has a dividend yield of 3.40%, and Abbott, 2.10%. In the past two years Abbott has boosted its dividend by 71%, and Abbvie’s is up 23%.
But in spite of these high odds for high profits, most investors choose to ignore spin-off plays, viewing them as too simple or too boring to fool with.
That's a shame. Because consciously ignoring a good spin-off opportunity isn't much different than spotting a $100 bill sitting on the sidewalk – and deciding it's not worth the bother to pick it up.
"Bill, as investments go, a well-structured spin-off is essentially like being given a gift," says Shah Gilani, a retired hedge fund manager who runs the Capital Wave Strategist advisory service here at Money Map Press.
"If you're talking about a tax-free spin-off, you get to keep the shares of the parent company you have. And you also get stock in the newly created venture – a company that's almost like a startup, except that it's well-capitalized, has a depth of experience in the business that it's in, and has a management team that's well-incentivized to succeed as an ongoing operating business. You end up with a situation where the parts, over time, end up being much, much more valuable than the whole. This gets proven time and time again."
A number of institutional and academic research studies show that spin-off stocks trounce the general market averages for as long as three years after the transaction. 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, it's not free money. But in the stock market, it's about as close as you're going to get.
On top of all that, Wall Street tends to ignore the profit potential offered by spin-offs.
Even though institutional investors drive the vast majority of stock trading, many pension funds and mutual funds are unable to purchase spin-off stocks. That's because the newly independent firms have market values that are too small for an institutional portfolio, or fall outside of their area of focus.
But here's the coup de grace: Many spin-off companies are ultimately taken over at hefty premiums to their market price.
Since the Abbott pick, we've recommended several other spin-off plays.
And we're always on the lookout for more.
Because any time we see easy money that's just sitting there for the taking, you can bet you'll be the first folks we tell.
That's why I've issued this report: to help you assemble a portfolio of these "special-situation" profit plays.
And the first company we're recommending is a classic example of why we love spin-offs.
Spin-Off Play #1: General Electric Co. (NYSE: GE)
I know this pick may surprise some of you.
After all, many folks think of GE as the old-school, mom-and-pop company behind microwaves, toasters, and dishwashers – hardly the cutting-edge technology of the 21st century.
But the truth is, after taking it on the chin during the "Great Recession" GE has embraced the most advanced technology and has restructured, reorganized, and remade itself into a thriving powerhouse.
And it has fine-tuned its focus by spinning off one of its most well-known businesses.
But before we get to that, let me tell you about another compelling reason you should be taking a hard look at GE.
GE Insiders Lead the Way
There are countless reasons for insiders to sell shares of the company they're running.
But there's really only one reason for them to buy.
And when those insiders are loading up in a market as rocky as this one has been of late – especially when we're talking about a "mature" firm in turnaround mode – well, you better take notice.
So, please listen carefully.
Since January of 2014, GE CEO Jeffrey Immelt has snapped up almost 145,000 shares of his firm's stock, dropping a little bit more than $3.6 million to make that happen. He now owns 1.99 million shares, worth about $50 million.
And Immelt isn't the only insider who is buying.
Since January 2014, two of the firm's top directors and officers have bought an aggregate 24,000 shares between them, spending $625,400 to do so.
All told, we're talking about $4.2 million worth of purchases. And these insider purchases are significant – on several levels.
First, as an extensive study by University of Michigan Professor Nejat Seyhun shows, stock prices tend to rise more after insiders add to their holdings than they do after insiders sell.
Second, insiders tend to increase their net purchases up to 24 months before a stock generates an above-average return. This was confirmed in a study by University of Houston Professor R. Richardson Pettit and P.C. Venkatesh from the U.S. Comptroller's Office.
And in another paper, professors Carr Bettis, Don Vickrey, and Donn W. Vickrey found that "outside" investors who mimicked the moves of insiders would have outperformed other stocks of the same size and risk by nearly 7% per year – even after factoring in transaction costs.
The bottom line: Insiders cash in from this legal type of "insider trading." And the returns they reap exceed those of the general market.
That means you and I would do well to follow their lead.
Here's why…
The "Internet of Everything" Brings GE In Touch With the Future
Back in 2008 and 2009, the financial crisis hit GE hard. Most of its problems had to do with the company's GE Capital unit – with assets that effectively ranked it as the sixth-largest U.S. bank. At the time, GE was strongly involved in derivatives and trading mortgage-backed securities, and got "lumped in" with other Wall Street investment banks and complex financial institutions like AIG that got crushed.
After GE saw its bottom-line earnings zoom from $1.55 in 2003 to $2.20 in 2007, company leaders watched as profits plunged all the way down to $1.03 in financial-crisis-ridden 2009.
The company's stock price plunged, too, and in 2009 GE's sacred dividend was slashed. Indeed, the cutback – which took the quarterly payout from 31 cents down to 10 cents – represented the first reduction since 1938.
Down… But Not Out
The parent company quickly forced a massive overhaul of its GE Capital unit. This was a wise move, but it didn't stop there.
GE went all out, reinventing itself around 14 brand-new revenue streams, most of which were based on what it calls the "Industrial Internet" to revitalize its product lines.
If the term "Industrial Internet" sounds familiar, it's because it's actually another name for the "Internet of Everything" (IoE).
GE's version of the IoE is a digital network that links machines and people across all their divergent platforms.
GE software engineers are using a "first-of-its-kind" industrial-strength software development platform called Predix to build the applications. The platform provides a standard and secure way to create apps for any machine or device connected to the IoE.
For example, GE businesses from aviation to healthcare have released 14 Big Data technologies in the last year to help airlines, energy companies, hospitals, and other customers cut downtime, improve productivity, and reduce emissions.
The ramifications for GE are big – so big, in fact, that the parent company recently earmarked $1 billion for the program.
GE figures $15 trillion could be added to global Gross Domestic Product (GDP) by 2030 if all those smart machines are managed properly. To give a little perspective, we're talking about an amount of economic output that's about the same amount as the entire U.S. economy.
The products have brought in $290 million in revenue and another $400 million in orders to date. The company now plans to leverage its high-margin $160 billion services backlog to develop more predictive technologies, grow software sales, and help customers become even more efficient.
And all of these moves are paying off for GE.
And the dividend is on the rise once again.
Back in December 2014, for instance, GE boosted its quarterly dividend to 23 cents a share – a 4.5% increase from the quarter before and a 21% boost from September 2013.
This was the fifth consecutive annual dividend increase for GE, and underscores the management team's belief in the company's overall health.
The 23-cent-a-share quarterly payout – 92 cents on an annual basis for a 3.40% yield – represents a payout ratio of about 53.2%, which should be sustainable.)
Analysts currently have target prices as high as $33 a share on GE – which would represent a gain of 27% from current levels of about $26.00. Add in the current 3.40% yield, and you're looking at a solid growth-and-income opportunity.
But we believe Wall Street is underestimating the potential windfall you could be grabbing from GE's shares.
Let me show you why…
Breaking Up Is Great To Do
Last July, GE spun off its $53 billion consumer-finance unit – a piece of GE Capital – as Synchrony Financial (NYSE:SYF), raising $2.8 billion in the IPO.
The spin-off was welcomed by much of Wall Street, since it was viewed as another "proof point" of the commitment GE had to lessening its reliance on financial-service businesses.
In the second step, the remaining shares will be distributed to GE shareholders in a "tax-free" spin-off transaction.
CEO Immelt said on a conference call to investors that the transaction is “effectively going to be a $20 billion buyback when we execute it,” according to Forbes.
The bottom line: This company's long-term prospects are outstanding.
The shares got off to a slow start in the New Year, but that has probably squeezed even more of the downside risk out of the shares.
You've got insiders buying.
You've got that pending spin-off in your back pocket.
And you've got paradigm-shifting technologies breathing new life into iconic businesses.
GE is a stock that you want to own – especially in a market as uncertain as this one.
Spin-Off Play #2 – E.I. du Pont De Nemours & Co. (NYSE: DD)
With a spin-off, even a mature, seemingly humdrum business like chemicals can create windfall profits for investors savvy enough to capitalize. And I know this from personal experience.
When I was covering Eastman Kodak Co. (OTC: EKDKQ) for Gannett Newspapers in the mid-1990s, the once-venerable photo giant was going through a restructuring that, at the time, would yield big profits for stockholders. Kodak broke up and auctioned off its Sterling Winthrop pharmaceutical company, and in 1994, it spun its Eastman Chemical Co. (NYSE:EMN) unit off to shareholders.
Today, Kingsport, Tennessee-based Eastman Chemical is one of the world's top specialty-chemical firms, with an $11.18 billion market cap and $9.53 billion in yearly revenue. And its shares have zoomed 179% over the past five years – not including the 2.10% dividend payout.
When corporate leaders order spin-off deals, they're doing so to "unlock" hidden value. And as the Eastman Chemical deal shows us, that's an eminently achievable goal.
So now you can see why Wilmington, Delaware-based DuPont would want to spin off its performance-chemicals division.
Generally speaking, DuPont's chemicals venture is very much a commodities business. It makes such products as paint pigments, refrigerants, and Teflon.
DuPont CEO Ellen Kullman says she wants to spin off the unit so the rest of the company can focus on "life-blood" growth opportunities like agriculture, biotechnology, nutrition, and energy.
Kullman said the chemicals division in question would be "a very strong industrial chemicals company," but said the unit's low rate of growth and volatile earnings profile meant that it hampered the broader company's push for growth.
With $4.9 billion in segment revenue, the performance chemicals business represents the single-biggest slice of DuPont's aggregate annual corporate sales of $34.9 billion. The company said in October 2014 that the $6.9 billion represents a 6% drop year-to-date.
That doesn't mean performance chemicals is a bad business. As a trimmer, more-nimble operation that doesn't have to serve the corporate master, this is a business that has opportunities on which to capitalize, says Michael Robinson, our resident tech expert here at Money Map Press and editor of the Radical Technology Profits advisory service.
"Given the markets it serves, and the fact that it has some truly great products, I believe the post-spin-off chemicals business can do quite well," Michael said. “Just take a look at fluoropolymers. These are best known as non-stick coatings for frying pans. But they are used in a wide range of applications that traverse the construction, aerospace, and electronics businesses.”
“The unit is also a major supplier of titanium products, most notably titanium dioxide, a white pigment used in paints, sunscreen, plastics, cosmetics, and electrical conductors found in a wide array of electronics.”
The business has been valued by analysts at $11.5 billion, about one-sixth of DuPont's market capitalization of $68.83 billion.
In December 2014 DuPont said the name of the new unit will be The Chemours Company. According to Marketrealist.com, the new company…
“…will be comprised of these three DuPont segments: Chemical Solutions, Fluoroproducts, and Titanium Technologies. Chemours will have approximately 9,100 employees and 37 production facilities in 12 countries. It will serve more than 5,000 customers worldwide.”
Kullman also said the transaction will be tax-free to shareholders at the time of the spin-off.
"I think the transaction makes a lot of sense for DuPont and its shareholders," Michael says. "As it's structured now, the conglomerate hasn't given the performance chemicals business the type of attention it deserves. Kullman has said she's uncomfortable with the fact that chemicals can have more volatile sales than DuPont's other products for the auto, energy, and electronics markets. But I do believe that with the right new management team in place the performance chemicals business can do extremely well."
The spin-off is part of a broader restructuring that DuPont launched in 2009, with the stated aim of realizing $1 billion in savings. The spin-off follows other transactions that have been part of that ongoing regrouping of the venerable chemicals firm.
In February 2014, for instance, DuPont sold its performance coatings business to private-equity venture Carlyle in a deal that was valued at $4.9 billion. That unit makes paint for cars and other industrial uses.
For the performance-chemicals business, Kullman says DuPont opted for the spin-off instead of an outright sale in order to accelerate the divestiture. Also, by pursuing a spin-off – instead of a sale – the company was able to achieve its goal of keeping tax-free status.
One day we'll be looking back at DuPont as that same kind of winner.
Spin-Off Play #3 Allegion PLC (NYSE: ALLE)
Allegion is a play on the red-hot residential-and-commercial security-products sector that was created by the early-December spin-off from Ingersoll-Rand PLC (NYSE:IR).
We typically make our recommendations before the separation transactions take place. But we like Allegion's makeup – and upside potential – so much that we decided to go ahead and make this recommendation despite the spin-off already having taken place.
The Dublin, Ireland-based Allegion describes itself as a company that "helps keep people safe where they live, work, and visit."
In other words, it touches just about every aspect of our lives.
The firm says that it specializes…
"In security around the doorway and beyond: Everything from residential and commercial locks, door closers and exit devices, steel doors and frames, to access-control and work-force productivity systems."
Allegion's offerings range from the very low-tech – we're talking here about steel doors and conventional locks – to the very high-tech: automated-access and security systems, video monitoring, and systems integration.
The company's 23 business brands include:
- Interflex Datensysteme GmbH & Co. KG, which offers such workforce-management systems as time accounting and automated scheduling, as well as security systems that include ID and access-card production, closed-circuit (CCTV) video surveillance, and biometrics.
- CISA®, a security pioneer that patented the first electrically controlled lock – back in 1926. It was also the first brand in the world to develop smart-card locks, which are used as electronic keys to safely and efficiently manage gates and entrances. CISA today develops and markets cylinders and locks for any kind of door, including electronic locks, panic bars, door closers, safes, and padlocks.
- Bocom Systems, which specializes in video monitoring solutions for city and highway traffic, as well as for airports, government buildings, and general surveillance. It designs, engineers, and installs both security alarm systems and more complex closed-circuit-based security networks.
- And Schlage, a 90-year-old company that's one of the top names in lock technology. This business unit creates conventional key locks, as well as advanced electronic and biometric lock systems.
- aptiQ Smart Technology, which uses an "open-architecture" to design readers, credentials, and smartphone-based security applications. The aptiQ portfolio includes easy-to-use readers that can accommodate most magnetic-stripe cards. This product line also allows for the creation and use of proximity cards, aptiQ "smartcards," and the latest in so-called "near-field communications" (NFC) technology – the know-how behind our May 2012 recommendation of NXP Semiconductors NV (Nasdaq:NXPI), a stock that has gained more than 150% since we recommended it to Private Briefing subscribers.
Incidentally, NXP is itself a 2006 spin-off from Koninklijke Philips Electronics NV (NYSE ADR:PHG) – which underscores, yet again, the powerful profit potential of "spin-off investing."
Meaningful Growth Potential
Although cybersecurity gets the big headlines these days – and rightly so, thanks to stories about the Sony and JPMorgan hacking attacks and retailers giving away our credit card numbers – the heightened focus on security extends to the "physical" space, which includes our homes and workplaces.
According to several analyses I recently read, the worldwide home-security-solutions market is benefiting from such technologies as wireless-communications, "wired" broadband, and the quickly emerging "sensors" sector (also known as MEMS). Home-security product segments include electronic locks, panic buttons, security cameras, sensors, and alarm systems. Electronic locks and sensors are the most popular.
Services include system design, integration (which often involves adding new components to an existing system – often one designed by a different company), maintenance, and monitoring.
With its array of products and capabilities, Allegion figures to be a strong player in this market.
Brian Leland, a product manager at Interlogix, a unit of United Technologies Corp. (NYSE:UTX), says interactive services are more affordable now than ever before. And that means the industry has a chance to boost the U.S. residential security system penetration rate well above the current 18% to 20% – a stagnant level that hasn't seen growth in a decade.
"Home automation has become much more mainstream in the security channel," Leland told SecurityInfoWatch.com recently. "Consumers are looking for something that takes care of their home. For [manufacturers] as we talk about product development, it's part of our core."
In fact, U.S. demand for private contracted security services is forecast to rise at a 5.4% annual pace between now and 2016, when it will reach $64.5 billion, says The Freedonia Group, a Cleveland-based researcher. That will drive revenue growth in several subsectors. Security consulting will lead gains, followed closely by systems-integration and management. Alarm monitoring and correctional facilities management will also do well.
And while the commercial market is larger, the growth in the residential market will be greater, the study says.
A recent report by Zack’s added that “Allegion primarily relies on the commercial and residential construction and remodeling markets, which have been picking up momentum of late, especially in the U.S.”
Allegion will not only benefit from all this growth – we believe it will advance at a faster rate than the market... for four key reasons:
- A Tighter Strategic Focus: Companies like Abbott or Ingersoll-Rand break themselves up for several reasons. But a key one is strategic focus. A newly independent firm can devote more money to research and development, to marketing, and to growth-bolstering purchases of technology or product lines from other companies. For spin-off companies, this newfound freedom generally leads to a tighter, value-maximizing focus – and faster growth than would otherwise have been possible. As an independent entity, Allegion will be able to make long-term decisions that provide maximum benefits to itself – instead of having to craft strategies that also benefit the "parent."
- A Greater Attention to Shareholders: As Allegion improves its strategic focus as a result of the spin-off, it will also be free to focus on its newly minted shareholder base. The company already announced a $200 million stock buyback, and has established a modest quarterly dividend of $0.10 per ordinary share, an increase of 25% over the prior dividend. Allegion now yields .60%. Expect more of the same as the company grows in both size and stature.
- A Less-Confusing Competitive Situation: When Google Inc. (Nasdaq:GOOG) announced it was dumping its Motorola handset business in a deal with China's Lenovo Group Ltd. (OTC ADR:LNVGY), it was only partly because the search giant didn't want to be in the manufacturing business. There was another reality at play here.
By selling handsets, Google was actually competing with the very companies that use its Android operating system. In other words, Google was competing with some of its customers. So now you can see why a spin-off firm often benefits from additional business once it's freed from its parent: once it becomes independent, a spun off company finds it much easier to grab business from rivals of its former parent. You can bet that Allegion will see some incremental growth for this very same reason.
- Building Through Buyouts: Now that it is untied from Ingersoll-Rand, Allegion is free to do deals for product lines, as we mentioned above, or even for entire companies. In fact, this is already happening. In January 2014 Allegion announced a $12 million deal to acquire key assets of Schlage Lock de Colombia SA, a privately held firm that's the No. 2 mechanical-lock maker in Colombia. Allegion CEO Dave Petratis has said his company will use its strong cash flow to finance strategic acquisitions – especially in emerging markets. And this deal "is an excellent first step in implementing our growth strategy," Petratis said, noting that his company will be looking to do additional deals.
It's only been a year, but Allegion's newly won freedom is already bearing fruit.
For its most recent quarter, Allegion reported net revenues of $458.7 million, down 13% compared to the previous year. The company’s full-year 2014 revenue was $2.1 billion, up 2.4% from the previous year.
Wall Street's "Smart Money" Likes Allegion
It usually takes time for the investment pros to warm up to a spin-off stock. With Allegion, however, the pros are getting sweet on the new company more quickly than you usually see.
Allegion currently trades at around $59, with consensus estimates giving a high target of $69.
A stock price of $69 would represent a respectable gain of 17% – not bad in a volatile market.
And that's just the start. As this company continues to capitalize on its newfound independence, its upside potential will only increase.
And don’t take our word for that.
We always counsel you folks to watch the "smart money" – especially insiders. And there's some smart money that seems to like Allegion's prospects.
Let's be clear: We don't believe that there's a lot of "smart money" on Wall Street.
But one exception might be the hedge funds, which can operate more effectively since they huddle in the financial market's shadows. And as an accompanying chart shows, these pros have taken some big stakes in Allegion following its late-2013 spin-off from Ingersoll-Rand.
Clearly, these hedge-fund managers understand – as we do – that spin-off plays can offer big upsides. Indeed, as we have maintained all along, spin-off investing is typically a high-return, low-risk way to invest in stocks.
That's why we're recommending companies like Allegion PLC, General Electric Co., and E.I. du Pont De Nemours & Co.
It's a strategy that works.
[Editor's Note: Unless otherwise specified, we recommend investors employ a 25% "trailing stop" on all holdings.]
