Value in spin offs!

Value, in the traditional sense as laid down by Graham focuses on the assets of the company. The idea was, if one did buy a company's shares at 2/3 the net current asset value, one was not only assured a margin of safety but one could also realise a potential price appreciation to book value.

Sir Warren Buffet went on to tweak what was conventionally thought of as value. You could sum up buffet's approach in a few words: "Good business at a fair price"

As it is, these 2 approaches in my opinion are used by so many investors in the states that it may be so hard to obtain really deep value with these 2 approaches. Just to illustrate, in the past, when buffet bought into washinton post, he realised the value was 4 times the price he was buying. These days, it is very hard to find such rare gems as because valu investors will buy stocks which have a 40% margin of safety. Also, ben graham stocks are nearly inexistent in the US now and it sure is a rarity. However, this is not to say that Ben Graham or Warren Buffet type stocks no longer yield sufficient return but rather returns in these methodologies are much less as in the past.

That being said, what i am truly trying to say is, if one wants to search for value, one has to in most cases a complete contrarian and example of such a prominent investor is Joel Greenblatt. Let me tell you, this chap, is a brilliant investor and more or less unconventional in every sense of the word.

His particular focus is spinoffs. Spinoffs are actually divisions within a company that are launched as a separate public listed entity. And management spins off other divisions within the company as they want to unlock the value inherent in the spin off.

Preliminary research on my part shows that spin offs can be rather attractive. For one, shares of spin offs are normally discarded by investors as for some reason, institutions were never interested in the shares of the spinoffs as these spinoffs may be too small for their consideration. As a result, the shares of spin offs are normally depresses creating a 'temporary' bargain price. It is not just the institutions that discards the shares. Investors in parent companies who are sometimes given shares in the spinoff would rather discard it as they do not have the inclination nor the time to do the research necessary to justify these spin offs as value plays. Lastly, in my opinion, spin offs are an area still relatively untouched by value investors. The conventional plays are the buffet types companies and spin offs are seldom buffet type companies and hence in my humble opinion, provides situations which can result in a larger than normal return.

Taking a look at some examples:

1)1 year from the spin off of GNW(genworth) from GE, its price rose 50%

2)1 year from spin off of moneygram, moneygram's share price rose 21%

3)1 year from the spin off of Freescale, it share price rose 20%

4)1 year from the spin off of Hospira, its share price rose 15%

If these examples are not enough to convince you, read on for more posts!!!




Lucas