Montreal (Canada) January 26, 2015 – When close to 49 publicly traded parent companies spun off one or more subsidiaries into independent companies in 2014, market analysts called it “the year of the spin-off.” But Stephane Manos, head of the Special Situations Department at Valsef Capital, predicts this accolade will be dwarfed by 2015, where 58 spin-offs are expected to be concluded in the United States, the highest number since 2000. Corporations currently evaluating spin-offs include such powerhouses as eBay and Hewlett-Packard.
The forecast, announced by Spin-Off Research, a Chicago firm specialized in tracking the performance of this niche group of stocks, is good news for investors who have seen companies listed on the Guggenhein Spin-Off ETF yield a return of 379% since the market hit bottom in March 2009, compared to 201% for the S&P 500 in the same period.
While a growing number of financial planners hail spin-offs as the new golden path to profits, Wall Street analysts continue to grapple with the difficulties of building reliable forecast models due to the frequent lack of reliable information. “Newly independent companies create opportunities for ex-division leaders turned CEOs, who find themselves at the helm of their own capital allocation and business strategies, with independent teams, but analysts can only speculate on how they will ultimately perform,” stated Stephane Manos. “The complexity of the evaluation remains the main obstacle to the emergence of a steady investor base.”
The key for new investors seeking to enter this niche market is to obtain guidance from advisors who are equipped to draw conclusions from events and corporate maneuvers surrounding a spin-off, from the moment the intention to proceed is announced. “Often, information is kept limited on purpose to ward off analysts, keep the stock price low, and for management to receive greater stock options,” continued Mr. Manos. “At Valsef Capital, we have found success by tracking and staying close to those insiders who stand to benefit the most from a spin-off.”
A powerful indicator of the anticipated future performance of a newly independent company is the portfolio of its top executives. “One of my rules in event-driven investing is to invest alongside with management,” expanded Mr. Manos. “We bank on companies where the amount of shares owned by managers makes up a significant percentage of their actual net worth, and where CEOs truly stand to benefit if the company increases in market value.”
Mr. Manos points to the recent example of Ashford Hospitality Trust (AHT), a Texas-based company that went public in 2004 with close to 80 million in cash and grew within 10 years into a mini-empire with 6 billion in assets under management and over 130 hotels. When AHT decided to spin-off its hotel management company, Ashford Inc (AINC), the information and revenue projections on AINC changed from one filing to the next, making it very complex to determine the number of outstanding shares to be issued or their actual distribution ratio. “Regardless of conflicting and often confusing reports, we knew that AINC management wanted the spin-off to happen for the right reasons,” explained Mr. Manos. “When AINC was finally spun-off in November 2014, Monty Bennett, AINC’s CEO, a seasoned hotel operator since 1990, began buying shares on the open market. The purchases constituted a sizeable percentage of his personal net worth. This confirmed our thesis and we proceeded to acquire shares alongside with him.”
In addition to this positive indicator, AINC holds a 20-year management contract with AHT and Ashford Hospitality Prime (AHP), a real estate investment trust focused on luxury hotels, and earns income every time it raises equity in those two companies. AINC also has a 60% stake in Ashford Investment management (AIM), of which Monty Bennett owns 25%.
To fully benefit from the exceptionally high number of spin-offs expected in 2015, opportunities abound. However, investors accustomed to relying on traditional methods of analysis will be best served to seek out the counsel of those investment firms, who have become specialized in the art of interpreting the myriad of insider events linked to a spin-off and drawing the necessary conclusions, an expertise akin to the proverbial “being able to read the writing on the wall.”