Speculative Spin-offs:
Overview
(Performance
Data)
While combing through the
universe of spin-off stocks to find the best candidates to
include in our Primary
Stock Portfolio, we reject stocks for a variety of reasons.
But we noticed that one type of rejected spin-off tends to
either soar or crash in a spectacular fashion. Since 2002,
we have classified these spin-offs as "speculative spin-offs"
and they have gained an average of 49.1%
per year, albeit with excess volatility. Due to their potential
for extreme risk and volatility, we cannot recommend this
category of spin-offs, but will now publish them for aggressive
investors with a higher risk tolerance to consider on their
own. Please note that the number of speculative spin-offs
may not be very high at times.
For example EnPro Industries
Inc. (NPO) was spun off from Goodrich several years ago, and
with negative earnings and the specter of asbestos litigation
hanging over the company, EnPro's stock price fell 66% during
the five months following its separation from Goodrich. We
labeled the company as too risky to recommend in February
of 2003. Over the next three years, EnPro's stock recovered
and gained 632%.
CenterPoint Energy spun off
Texas Genco. Similar to EnPro, Texas Genco also had negative
earnings. In addition, the company had seen its revenues fall
by 55%. Therefore we categorized the spin-off as too risky
in 2003. Texas Genco then went on to surprise many when its
stock rose 229.5% over the next twenty-two months. The company
was eventually bought out by GC Power Acquisition for $3.65
billion.
Monsanto Co. (MON) was spun
off by Pharmacia Corp. and in 2002 we labeled the company
as too risky, due in part to negative earnings, a negative
net profit margin, and falling analyst ratings. Over the next
three years, Monsanto's stock rose 334.3%. It's almost as
if the more dire the outlook, the better some spin-offs
perform.
However, not all of these
speculative spin-offs succeed. In 2004 we categorized Washtenaw
Group (TWH) as too risky because we believed its mortgage
business would go south. It did and the company applied for
delisting from the American Stock Exchange nearly two years
later. Washtenaw's demise didn't occur overnight; if the company's
shareholders had used stop-loss
orders, they would have missed a large part of the damage.
Fortunately, we never recommended the company due to its extreme
risk.
As we mentioned above, we
reject spin-offs for a variety of reasons, but those that
we reject due to extreme risk often seem destined to either
be a home run, or a strikeout. For experienced, aggressive
investors who want to know about the handful of stocks that
occasionally end up being categorized as "speculative
spin-offs," we will now list the stocks here
and will remove them when they reach a selling point.
Once again, please note we
are not recommending the purchase of these
stocks due to their extreme risk and the number of
speculative spin-offs may not be very high at times.
We are merely mentioning them for experienced, aggressive
investors who are willing to do their own due diligence to
find opportunities to occasionally swing for the fences, despite
the perceived high risk.
Performance
of Speculative Spin-offs |
|
Total
Return Since Start of Tracking1 |
| |
| Speculative Spinoffs: |
886.2% |
| S&P 500: |
50.1% |
|
Average
Annual Return |
| |
|
| Speculative Spinoffs: |
49.1% |
| S&P 500: |
7.3% |
|
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|
