Stocks that have been spun off from larger corporate parents have been shining brightly in the investment world this year. With a total of 15 companies completing spinoffs in 2024, including the notable General Electric aviation and energy split, investors have seen impressive returns. One standout example is the rally of over 23% in shares of GE Vernova since they became available for trading in late March.
Spinoffs offer a unique opportunity for investors to capitalize on unlocked and potentially undervalued assets. According to a recent report by Morgan Stanley, spinoffs have historically outperformed the broader market by more than 2% two years after the split. In contrast, parent companies have underperformed by 8.1%. This presents an enticing prospect for investors seeking higher returns.
While not all spinoffs guarantee success, there are certain indicators that can help identify promising opportunities. Companies that spin off entities in a different sector often see their new stocks outperforming, as they are likely undervalued. Conversely, spinoffs within the same industry could signal a parent company trying to unload underperforming assets. Additionally, a higher valuation may indicate better quality, as evidenced by spinoffs with higher valuations trending better in the market.
One of the current favorite spinoff stocks highlighted by Roth MKM is GE Vernova, which they recommend as a strong buy. Another beneficiary of a successful spinoff is Esab, a company specializing in welding and cutting equipment. Roth MKM advises investors to consider buying Esab stock on pullbacks, as it has already rallied almost 28% this year. Paper producer Sylvamo is also on the rise, with shares surging more than 34% in 2024 following its separation from International Paper.
For investors looking towards future opportunities in spinoffs, several health care companies are scheduled to spin off businesses in the second half of 2024. Baxter International plans to spin off a kidney care company called Vantive, while Edwards Lifesciences will separate its critical care unit. These spinoffs present potential investment prospects despite the current market performance of the parent companies. Unilever also plans to spin off its ice cream business in the fourth quarter, offering another avenue for investors to explore.
Through careful analysis and consideration of spinoff stocks, investors can unlock hidden value and potentially achieve higher returns in their investment portfolios. As the trend of spinoffs continues to gain momentum, it is important for investors to stay informed and seize the opportunities presented by these unique investment vehicles.
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