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Joel Greenblatt, the founder of the hedge fund Gotham Capital and adjunct professor at Columbia Business School, managed to build a stellar track record from 1985 to 1994 with average returns of 50% per year by focusing on special situations and event-driven strategies. He published You Can Be a Stock Market Genius in 1997 and made the case for tracking spin-offs and especially paying attention to insiders of spin-offs. Towards this end, we started tracking spinoffs on InsideArbitrage in 2016 and as a premium subscriber you have access to both the list of upcoming spinoffs as well as completed spinoffs that allow you to track the performance of both the spinoff as well as the parent company.
With spinoffs garnering widespread attention in recent years both on account of Greenblatt’s book and various academic studies that have shown them to outperform the market, one would expect that this niche of the market may not do quite as well as it has in the past. I decided to pull up the list of all completed spinoffs since 2016 to see how both the spinoffs and their parents (or stubs) performed.
In keeping with academic research that shows that the parents of spinoffs are best avoided, the returns of the 39 spinoffs I analyzed were 15.87% on average, while the parents only generated returns of 3.61%. I used the closing price on the first day after the spinoff as the purchase price and the closing price from Friday, June 22nd to calculate returns.
Considering these companies were spun out at different times over the last two and a half years, looking at annualized returns (or IRR) makes more sense. The average annualized returns for the spinoffs was a very healthy 33.10%, while the parents generated average annualized returns of -8.15%. In case you are wondering why the average annualized returns of the parents is negative, the underperformance of a parent from a recent spinoff, is skewing the results.
There are exceptions to every rule and in the case of one upcoming spinoff, the parent is actually more interesting than the company that will be spun off. I came across this situation after seeing a number of insider purchases in the retail REIT DDR Corp. (DDR) during a period when several retail REITs had lost more than half their value and in cases like DDR, they had lost more than two thirds of their value from peak to trough. While the market had given up on both retail stocks and retail REITs, several insiders were buying actively and the retail sector has rebounded sharply from its lows. The purchase of Whole Foods by Amazon.com (AMZN) probably signaled the bottom in the industry. Retailers had gotten so cheap that even E-commerce behemoths were willing to pick up brick-and-mortar retailers at attractive prices as the entire industry shifted to a hybrid model of E-commerce and physical locations.