How To Invest In Corporate Spin-offs

By Casey Murphy | August 15, 2014 AAA

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Twenty-First Century Fox Inc. (FOX) confirmed a proposal to combine with Time Warner Inc. Eventually the proposal was withdrawn, which has led to increased volatility in both stocks.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.)

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