Spinoff Stock Research

Monthly report of spinoffs and special situations for professional value investors.

Contents

Our value proposition to investment managers

We believe Spinoff & Reorg yields as many good ideas as a decent captive analyst — but at over 100 times lower cost. Most of our subscribers are hedge funds, private foundations and other investment managers; we augment their in-house analytical teams with a steady flow of unexpected ideas.

All the taste, half the calories

Some securities research reports appear to value themselves by volume. We pursue the opposite. Reports are 7 to 8 pages — not 40 — because we leave out the usual filler, such as extrapolated earnings forecasts, and extensive cut-and-paste from public filings. The result is a nutritionally dense core of unusual ideas, all but invisible to the major data feeds, and pre-screened to fit traditional value investing criteria.

Flexibility

Spinoff situations vary widely in quality, so we never recommend them carelessly or blindly. Instead, our ideas change flexibly with conditions.

For example, our July 2012 monthly recommendation was not a spinoff, but a canceled spinoff. Shares of insurer Old Republic International (ORI) had plummeted to barely half of tangible book value after it gave up plans to spin off a failing mortgage insurance subsidiary. Speculators, who had bought blindly on the prospect of a spinoff, were hammered on the cancellation. It was here that we saw an entry point.

Investors were fleeing perceived holding-company-level exposure to the subsidiary, but we found this fear was unsubstantiated. Moreover, the CEO himself was the largest non-institutional ORI shareholder, with most of his net worth in ORI shares, most of his personal income coming from ORI dividends, and a consistent history of open-market purchases in ORI.

We recommended buying. ORI shares were up almost 70% in the next nine months.

This was a natural result of our tactical flexibility (buy what makes sense right now) and philosophical inflexibility (only buy good, cheap companies).

Thoughtful heresy

Our pick of the month for the January 2011 issue was Farmers National Bancorp (FMNB).  Superficially, this looked like a post-bubble community bank in the middle of the Rust Belt — what could be more toxic?  But on scratching the surface we found it was located in a rural pocket of Ohio where residential prices had actually gone up since the real estate crisis began.  FMNB was profitable, growing, diversified into asset management, and had passed the gallstone of bubble-era writedowns.  Insiders were buying heavily through a rights offering structured to discourage outsiders.  Most important, FMNB was wildly underpriced relative to tangible book value.

FMNB was up 22% after 6 months, and over 80% after 14 months.

In our November 2008 issue, the pick of the month was luxury goods maker Coach (COH) at 16.68. At the time, retail was in free fall, and no institutional analyst had assigned a buy to COH.

COH was up almost 50% in the next six months.

While one might fairly ascribe a single high short-term return to luck, the risk/reward imbalance here was obviously attractive. Coach was a growing, strongly branded, highly profitable, debt free, globally diversified firm with a net earnings yield over 13%. Insiders had just purchased almost a million dollars of COH, contrary to previous trends. The company planned to repurchase another 20% of shares. Current ratio was 3, so insolvency risk was relatively low even during the credit meltdown.

As we wrote at the time, we particularly liked COH’s likely resistance to inflation and/or dollar weakness. Again, almost no one was talking about future inflation in autumn 2008, except us.

We didn’t expect COH to recover so quickly, but its eventual success looked likely. Fundamentals all pointed the right way, and insolvency risk, even in a full-blown depression, was low. Safe, cheap, no hurry: this is how we think about investing.

Gain an information edge over Capital IQ

Value investment managers often rely upon subscription data services like Capital IQ. This creates the risk of a “data monoculture,” in which too many investors mine the same few data sets with the same few approaches.

Spinoff & Reorg offers an alternative by introducing a new data set. Fresh spinoffs, their parent companies, and many other situations on which we report, have undergone capital structure changes so recently that Capital IQ and its competitors tend initially to report their financials incorrectly or not at all. This can create a temporary window of inefficient pricing, visible to our subscribers.

Global and obscure, but US-traded

Did you follow Compagnie Financiere Richemont in 2008, or Barloworld in 2007, or Husqvarna in 2006? All three are foreign midcap spinoffs or parents thereof, obscure in the US but listed on the Pink Sheets, and all enjoyed relatively obvious windows of low price within a few months after listing.

Spinoff & Reorg covered all three, and many more. In addition to exhaustive US coverage, we offer ideas far afield of the usual suspects.

Try it with no further commitment

We expect to earn our keep every single month. We’re sufficiently sure of this, in fact, that we don’t require an annual subscription. You can go month-to-month with a credit card, and cancel anytime. (Exception: due to administrative overhead, soft dollar subscriptions are annual only.)