I love corporate spin-offs – and you should, too.
With spin-offs, companies unlock hidden values in their operations and pass them on to shareholders – offering low risks and high probabilities of market-beating profits.
And the past month or so has produced a bonanza.
First, eBay Inc. (Nasdaq: EBAY) said it is spinning off its very successful PayPal digital payments firm. Then, Hewlett-Packard Co. (NYSW: HPQ) announced that it plans to divide itself in half.
And most recently, security software maker Symantec Corp. (Nasdaq: SYMC) joined in and said it’s splitting in two.
Overall, spin-offs are estimated to be worth $1.6 trillion so far this year.
Here’s the hitch.
As promising as all that money sounds, most of these deals won’t take effect until the second half of next year.
But I have uncovered a way to take advantage of the growing market for spin-offs right now.
Breakin’ Up Is Good for You
I’ve been around high-tech investing for more than 30 years now, and I haven’t seen this many spin-offs since 2000.
Spin-offs are not limited to high tech, of course. However, of the roughly 30 major spin-offs in the works, 19 – or nearly two-thirds – are related to tech or the life sciences.
According to forecasting firm Dealogic, corporations have sold or spun off $1.6 trillion worth of subsidiaries and business lines globally so far this year. And by its measures, Dealogic says this is the most active the spin-off market has been since 2007.
I pay attention to spin-offs because I know just how lucrative they can be for tech investors. And the research backs me up.
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, spin-offs create “easy money.”
Before we get to our own spin-off investment, let’s take a look at this early fall’s trio. We’re already invested in a couple of them.
The PayPal spin-off is going to be a major boon for eBay shareholders, who already saw their shares jump 7.5% on the news. The whole digital payments realm is finally opening up – the recently announced Apple Pay offering from Apple Inc. (Nasdaq: AAPL) and AliPay from Alibaba Group Holding Ltd. (NYSE: BABA) are two great new examples.
And PayPal as the “growth” component of eBay is poised to capitalize.
Sales at PayPal nearly tripled during the five-year stretch that ended in 2012, and the eBay unit now “facilitates” $1 of every $6 spent online. But PayPal is ready to leapfrog eBay’s core “marketplace” business. In the calendar second quarter, PayPal sales jumped 20% to $1.95 billion, while eBay’s mainstay business saw its revenue advance 9% to reach $2.17 billion.
Hewlett-Packard also has been a recommendation around here for a while. I first shared it with you all in July 2013, and it clobbered IBM Corp. (NYSE: IBM) in our “Clash of the Tech Titans” this past July.
And since then, HP shares have reached peak gains of 56.8%.
In the split, HP Inc. will devote its operations to PCs and printer sales. Hewlett-Packard Enterprise will serve large organizations by focusing on computer servers, data-storage equipment, software and consulting services.
HP said the change will allow the enterprise unit to focus on such growth areas as cloud computing and Big Data at a time when PC sales are week, declining 10% last year.
And at Symantec, one spin-off will focus on computer security, including the company’s well-known Norton antivirus software. The other will specialize in information management, including backup and recovery, archiving and “eDiscovery.”
For this deal, think of the security unit as the “parent company.” Symantec said investors will receive shares in the information management unit as a special tax-free dividend.
The One Investment
As much as I like these and other corporate spin-offs, the market is moving so rapidly that it’s easy to get overwhelmed examining the growing list of opportunities.
And spin-offs pose some other challenges for investors. For instance, it’s hard to keep track of the actual spin-off dates of record to know just when to buy. In some cases if you get in early, you may tie up your cash for months waiting for the tax-free stock dividend.
That’s why every tech investor ought to take a close look at the Guggenheim Spin-Off ETF (NYSE Arca: CSD), which specializes in just these kinds of deals. Started in December 2006 and now with 33 holdings, CSD is the only ETF focused on spin-offs.
Like investing in spin-offs themselves, CSD offers modest risk to investors and a good chance at high returns – except even more so.
CSD invests in a broad array of sectors such as, energy, restaurants, and entertainment. And it holds several intriguing tech and life sciences firms in its portfolio.
For instance, Zoetis Inc. (NYSE: ZTS) is the largest independent company in the animal health sector. It is CSD’s second-largest holding and makes up 5.5% of the fund.
Spun off from Pfizer Inc. (NYSE: PFE) in June of last year, Zoetis is a sprawling global enterprise with operations in 60 countries. Zoetis derives about 75% of sales from livestock products and the rest from the pet market. It counts 300 separate products lines, including vaccines, medicinal feed additives and pharmaceuticals.
With 60 years of experience. Zoetis had $4.6 billion in sales last year. Trading at $37 a share, it has an $18 billion market cap and strong financials. It has operating margins of nearly 24% and a 50% return on equity.
CSD also allows you to tap into the early-stage biotech boom without taking on all the risks of investing in pharmaceutical companies without products on the shelves yet. The ETF owns shares of Prothena Corp. PLC (Nasdaq: PRTA), a biotechnology firm focused on neurodegenerative disorders such as Parkinson’s.
Prothena specializes in making antibodies that target improperly folded proteins. Its pipeline also includes discovery-stage programs that ultimately may offer treatments for Alzheimer’s disease and type 2 diabetes.
Prothena’s story may be the most intriguing in CSD’s portfolio. Elan Corp. Ltd. (NYSE: ELN) acquired Prothena’s forerunner back in 1996. Following that move, Elan itself went through a demerger of its early R&D unit in December 2012, and Prothena was born.
Today, Prothena has rapid sales growth, a market cap of $543.1 million, $303 million in cash on hand and no debt. It makes up 0.75% of CSD.
Another CSD holding, ADT Corp. (NYSE: ADT), is best known as home security firm. But it offers much more than that.
Thanks to research and development in its longtime home security business, the company has quietly become a leader in advanced sensor technology. And those advanced sensors have become a big part of ADT’s smart-home and medical tech divisions, both of which are also tied to mobile technology.
ADT remains the industry leader in tech-centric home and small-business security. With a total of 6.5 million clients, ADT has 25% of the $11 billion home security market. It also ranks first in serving small businesses, where it commands a 13% share of a $2.4 billion market.
ADT is the fund’s fifth-largest holding and makes up 4.89%. It was spun off from onetime global industrial conglomerate Tyco International Ltd. (NYSE: TYC), now focused on fire prevention, in October 2012.
With 135 years in the field, ADT had annual sales of $3.31 billion in 2013. The company has a $5.86 billion market cap with 20.7% operating margins and an 8.4% return on equity.
With exciting holdings like that and excellent performance since 2006, the Guggenheim Spin-Off ETF is a very cost-effective way to target the entire spin-off boom with on single investment
The ETF trades at roughly $43.75. Over the past two years, it has eclipsed the overall market, rising 60% compared with 36.6% for the Standard & Poor’s 500 Index.
It’s one of those balanced investment vehicles you can count on for the long haul.
After all, spin-offs will likely continue to be a major way that tech and other firms unlock hidden (and tax-free) value for the shareholders.
And with this savvy ETF, you get the power of having 33 high-quality spin-offs working for you – all at the same time.
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