Spin-Off Value

The anti-merger, or spin-off, seems to be benefiting investors. The Bloomberg Spin-Off Index (BSOI) is up 41 percent in the past year compared to the 12 percent increase in the S&P 500. For the past 17 years, spin-offs have outperformed the S&P 500 by 13 percent in the year following the spin-off. There are structural reasons that this anomaly might exist including: the new management is forced to run the new business more efficiently, the new company lacks analyst coverage resulting in forced sales by index funds and investors who didn't buy the stock directly, and a soft landing set up by the by the parent, who might undervalue the spin-off to lower expectations on the new company.