It goes without saying that the stock market is an extremely
competitive arena. Money management firms spend millions to find
profitable niches, strategies and tactics.
Where short-term trading is concerned, the advent of
high-frequency trading has made speed more important than ever.
This niche has become so competitive that some firms have
relocated their operations to their stock exchange's facilities
to get their orders to the exchange before the competition's.
Fortunately, long-term investors don't have to concern
themselves with the arms race in high-frequency trading. While
large firms fight it out for microsecond advantages, long-term
investors can exploit time-tested niches. One such niche
outperformed the S&P 500 Index by an average of 13% from
January 1995 to July 2012, including a period of 45%
outperformance between 2000 and 2005.
However, the success of this strategy hasn't captured
investors' interest. One reason, to be frank, is that it's a
little boring in comparison to other investing strategies.
Another is that after the catalyst for this strategy occurs,
shares often trade lower for the first month or so. A third is
that this strategy was decimated during the 2008 financial
crisis. These factors appear to work in unison to spook many
investors despite the high returns.
This strategy is known as spin-off investing. It entails
buying shares in a company that has been spun off from a larger
parent firm. A parent company may have many reasons for spinning
off a subsidiary, but typically, the primary goal is to increase
shareholder value by jettisoning debt and slashing expenses.
Yet shareholders of the original company often dump their
granted shares of the new, smaller company. This is shareholders
in the parent company often have no interest in owning the
spun-off company, so they sell their shares, sending the
spin-off's stock lower -- at least initially. However, other
investors often recognize the value in the spin-off's lower
price, sending shares on an upswing.
Spin-offs are often successful, and one main reason is that
the spin-off's executives are frequently given greater incentives
-- in the form of stock options in the new company -- to succeed
than they may have had at the parent firm. Think of a spin-off as
a startup -- but one with a seasoned executive staff, an existing
business model and customer base, and direct experience in the
You can search for pending spin-off companies on the
website and by keeping up with the financial news. Several of the
most successful spin-offs include
Hillshire Brands (NYSE:
, spun off from the Sara Lee Corp.;
Mondelez International (Nasdaq:
, spun off from
Phillips 66 (NYSE:
, spun off from
My favorite way to invest in spin-offs is to gain diversified
exposure to the best spin-off companies through the
Claymore Beacon Spin-Off ETF (NYSE:
The top 10 holdings include:
(Data as of 11/11/2013)
With $370 million in assets under management, this
exchange-traded fund comprises the 25 spin-off stocks ranked
highest by the fund manager's proprietary methodology. Each stock
can represent at most 5% of the portfolio, ensuring solid
diversification and making the ETF less risky than individual
stocks. CSD is up nearly 39% this year and boasts an average
five-year return of nearly 20%.
Risks to Consider:
This ETF got trounced during the 2008 financial crisis, and
it's tightly tied to the overall economy. Always use stop-loss
orders and diversify across sectors and strategies in your ETF
Action to Take -->
Buying on a breakout close above $44 with a 12-month target price
of $50 makes solid sense.