It seems like every day that there is news of a giant U.S. company spinning off one of its holdings in an attempt to drive shareholder value. For those who are unfamiliar with this type of corporate action, a spin-off occurs when a diversified business divests a portion of its business create a new stand-alone entity. In many cases, the two companies are often better off and both can often make interesting trading candidates.

A recent example is of Time Warner Inc. (TWX), which announced on June 6 that it completed the spin-off of Time Inc. (TIME). Interestingly, on July 16, Twenty-First Century Fox Inc. (FOX) confirmed a proposal to combine with Time Warner Inc. Eventually the proposal was withdrawn, which has led to increased volatility in both stocks. The key takeaway here is that once the spin-off was complete, Time Warner was much more of a pure play entertainment business than it was before. The spin-off may or may not have been a factor of 21st Century Fox’s interest in the business, but either way the underlying fundamentals of TWX were drastically different as of June 6. (For more, see: Time Warner Spin-off Reveals Hidden Value.)

Another recent example is media concern Gannett Co. Inc. (GCI), which announced on Aug. 5 that it would spin-off its lagging publishing business to shareholders to free up its faster-growing businesses, such as broadcasting and digital.

For traders who want to invest in spin-offs, it can often demand an intimate following of day-to-day corporate announcements. Many investors do not have the discipline, time or interest to comb the market news for spin-offs to add to their portfolio. As a result, many investors turn to the Guggenheim Spin-Off ETF (CSD), which holds a basket of companies that have been spun-off within the past 30 months (but not more recently than six months prior to the applicable rebalancing date).

As you can see from the weekly chart of CSD, the fund has been trading within an extremely strong long-term uptrend since late 2009. Granted the price has been trading within a consolidation pattern since late 2013, but this horizontal pattern (shown by the blue dotted lines) will be used by traders to signal a great trading opportunity. (For more, see: Channeling: Charting A Path to Success.)

Creating a Watch List Of Spin-offs

For traders who want to develop a watch list of spin-offs, one of the best ways is to check out the top holdings of CSD, which you can see in the table below:

Company

Weighting (%)

The ADT Corp. (ADT)

5.26

WPX Energy (WPX)

5.16

Brookfield Property Partners (BPY)

5.02

Zoetis Inc. (ZTS)

4.93

Whitewave Foods Co. ( WWAV)

4.83

Source: Guggenheim Investments

Spin-off Stocks Breaking Higher

As you can see from the table, ADT Corp is the largest holding. After closer examination of its stock chart you’ll see that it's currently breaking above the resistance of a key descending trendline (dotted line). The strong move above the 200-day moving average, combined with the bullish MACD buy signal, will also be used as technical buy signs. Long-term investors will likely protect their positions by placing a stop-loss order below the two moving averages near $33.79.

The Bottom Line

A spin-off is a corporate action used by management of large publically traded companies in an attempt to increase shareholder value. In many cases, a spin-off is a win-win situation for the companies involved and the move is generally viewed as a catalyst worthy of creating a watch list of key players. One popular choice amongst retail investors is the Guggenheim Spin-Off ETF (CSD). However, if one wants to invest in particular names then it could prove useful to take it a step further and investigate its key holdings such as ADT. (For more on this topic, check out: The Appeal Of Company Spinoffs.)

Related Articles
  1. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  2. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  4. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  7. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  8. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  9. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  10. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  3. Organizational Behavior - OB

    Organizational Behavior (OB) is the study of the way people interact ...
  4. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  5. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  6. Ex Gratia Payment

    A payment made to an individual by an organization, government, ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  5. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!