This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Profiting From Spinoffs

Stocks in this article: CSD SPY MDY TRIP EXPE AMCX CVC NVQ NG HII NOC PFE ZTS

NEW YORK ( TheStreet) -- The history of the ETF industry includes some very off the wall fund concepts including one from the early days with the Guggenheim Spin-Off ETF (CSD) which began trading in late 2006 as the Claymore/Beacon Spin Off ETF. It was so off the wall I didn't even bother writing about it when it first came out.

The fund will celebrate its seventh anniversary in December and its long term performance has been stellar. It has only lagged behind the SPDR S&P 500 (SPY) for one calendar year in 2008 since its inception. Similarly it only lagged the SPDR S&P Mid Cap 400 ETF (MDY) in that same year. CSD is more of a mid-cap fund so the comparison to MDY is more appropriate.

The basic idea is that CSD owns 24 spun off companies. A stock is eligible for inclusion in the fund from month six through month 30 after the spinoff. A spinoff is defined as a distribution of stock by a parent company or a carve-out where the parent sells only a portion of the subsidiary.

The current makeup of the fund allocates 23% to industrial stocks, 22% to consumer discretionary, 17% to energy and several other sectors with smaller weightings including 4% to financials and no exposure to health care. There are no market cap restrictions but the Guggenheim web page for the fund notes that it will focus on small and midcap stocks.

Some of the holdings will be familiar like Trip Advisor (TRIP) which was spun off from Expedia (EXPE) and AMC Networks (AMCX) from Cablevision (CVC). Some will be less familiar like NovaCopper (NCQ) which came from Novagold (NG).

It is important to note that the makeup of the fund can change over time. In a year or two the sector weightings could be much different and certainly in two years many of the holdings will no longer be in the fund due to the 30 month restriction.

The one year that the fund lagged behind the broad market was the crisis year of 2008. While there can be no assurances about future performance a seven year track record is meaningful. The idea behind spinoff investing is that the market will reward the attributes of the new spinoff as a stand-alone company more so than when part of a conglomerate as has been the case with AMCX which is up 90% since its spinoff in June 2011 while CVC has declined 35% over the same period.

Waiting for six months before being eligible for inclusion is strategically significant. There can be an effect on spin offs where they initially trade lower due to not being a constituent of the index that the parent firm is in or fundamental investors only wanting to own the parent and not the spin off.

An example of this is CSD holding Huntington Ingalls Industries (HII) which was spun off from Northrup Grumman (NOC) in April 2011 and went on to decline 38% in its first five months of trading. Since that decline however HII is up 176%. Obviously it will not always work out this way. When Pfizer (PFE) spun off Zoetis (ZTS) earlier this year it immediately went up 11% in its first month and is down 6% since then.

As a broad based fund CSD could be thought of as a potential core holding. Its strategic overlay makes it similar to the so called smart beta funds discussed in recent articles but like any other smart beta fund with a sound strategy, there can be no assurances that the strategy will always succeed.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs