Portfolio manager Joel Greenblatt is probably best known for creating Magic Formula Investing — a simple way to find good businesses at reasonable-to-cheap prices. Before that, he wrote a book called You Can Be A Stock Market Genius, which discusses spinoff stocks and other less-known investment strategies.
The fact is, spinoff stocks make outsized returns for those willing to take the time to study them before their actual separation from the parent.
According to a study by Deloitte and The Edge, spinoffs have delivered (2000-2014) ten times the returns of the MSCI World Index over their first 12 months as an independent company.
The best part about stock spinoffs is they tend to happen in both good and bad economic climates and in every month of the year, meaning you’ll never run out of new ideas.
Interestingly, if a parent company takes more than six months to prepare for the spinoff of a division, the returns, once it is separated, tend to be 50% higher.
With that in mind, I’ve selected seven spinoff stocks that have gone public since October 2016. Some of them are value plays while others are momentum stocks.
But all of these spinoff stocks are worth considering.
Adient PLC (ADNT)
Adient PLC (NYSE:ADNT) was spun-off from Johnson Controls (NYSE:JCI) in October 2016. The oldest of the seven spinoff stocks, both it and its parent have seen their respective shares lose ground over the past 23 months.
Adient, which is the world’s largest automotive seat maker with 238 assembly plants in 34 countries, has an over-reliance on Chinese revenue, as it generates more than one-third of its top-line from China.
Given that the Chinese appear to want to fight Trump’s tariffs tit for tat, ADNT investors might want to brace for more volatility in the future.
It has a new CEO starting at the beginning of October with lots of automotive industry experience to guide it through choppy waters.
The company still expects 2018 EBITDA of $1.25 billion from $17.5 billion in revenue. Although that’s down from $1.4 billion earlier in the year, it’s still positive.
The significant risk with Adient is its debt — more than $3.4 billion or 2.8 times EBITDA — suggesting that its stock is best suited for aggressive investors.
Lamb Weston (LW)
Lamb Weston (NYSE:LW) was spun-off from Conagra Brands (NYSE:CAG) in November 2016. The second-oldest of the seven spinoff stocks, it has had a massive run since going public, up 124% … 17 times the return of its parent.
Is there more in the tank? I think so.
Lamb Weston grew revenues 8% in fiscal 2018 to $3.4 billion with operating income up 12% over last year. In fiscal 2019, it expects revenues of approximately $3.6 billion and adjusted EBITDA of $865 million, up 5.5% over 2018.
“We’re pleased with our strong performance in the quarter and for the full year, and feel good about the operating momentum that we’ve built,” said Tom Werner, President and CEO in July. “Our financial results reflect the favorable operating environment that we’ve enjoyed over the last couple of years.”
Werner expects more of the same in 2019 with its Grown in Idaho brand of french fries leading the charge.
I’d call this one of the most stable of the spinoff stocks I’ve listed. Boring, but reliable.
Hilton Grand Vacations (HGV)
Hilton Grand Vacations (NYSE:HGV) was spun-off from Hilton Hotels (NYSE:HLT) in January 2017. Both stocks have performed admirably since with HLT and HGV up 40% and 30% respectively in the 21 months since.
Hilton Grand Vacations is Hilton’s former vacation ownership segment.
On Sept. 10, 2018, HGV announced it had acquired an interest in some of the timeshare weeks at The Crane Resort in Barbados. The timeshare weeks will be rebranded as Hilton Grand Vacations at the Crane. It is the company’s first property in the Caribbean.
“Our owners tell us how much they love beach vacations, so we couldn’t be more excited to offer our first Caribbean destination within a world-class resort and a spectacular location,” said Mark Wang, president and CEO, Hilton Grand Vacations. “This new project is one more way we’re continuing to expand our brand presence and maximize customer experience.”
Hilton Grand Vacations will pay $54.6 million over three years for the timeshare inventory of one, two and three-bedroom apartments.
To be successful in the vacation ownership space, it helps to have Caribbean locations to offer your customers, whose average household income tops $113,000 and travels 25 days a year for leisure purposes.
Although millennials make up just 18% of its customer base, I believe that will grow as younger people divert their disposable income away from home ownership into more experiential investments.
Looking forward, analysts are concerned about Amazon (NASDAQ:AMZN) taking some of its market share after launching its own motor oil, Amazon Basics Full Synthetic Motor Oil, in July. By selling a quart for almost one-third the price, it’s easy to see why.
However, Amazon doesn’t have what Valvoline has: a network of 1,154 stores in the U.S. with 73 about to enter the picture after it acquired the Great Canadian Oil Change — Canada’s third-largest quick-lube chain — in July. This gives it a new market to penetrate.
While its core North American market might lose a few sales and see profits drop, its Quick Lube business will continue to grow at much healthier margins.
Down 16% year-to-date through Sept. 24, now is a good contrarian entry point.
JBG Smith Properties (JBGS)
JBG Smith Properties (NYSE:JBGS) was spun-off from Vornado Realty Trust (NYSE:VNO) in July 2017. Since the spinoff, both stocks have gone sideways, with JBGS delivering the better return of the two, up 1.5% compared to a 3.2% decline for Vornado.
If you want to own quality commercial real estate properties in the Washington D.C. area, JBG Smith Properties is the way to go. It owns and operates almost 20 million square feet of D.C. real estate with another 17.2 million square feet in development.
The political situation aside, the Washington D.C. economy is doing exceptionally well with a low unemployment rate of 3.7%; it continues to benefit from a growing technology sector in the region.
It’s possible that Jeff Bezos will decide to locate Amazon’s second U.S. headquarters in the D.C. area by the end of 2018, setting up for a stronger market next year.
Real estate in general has underperformed in the last couple of years. I expect 2019 and beyond to be much better for JBGS investors.
Hamilton Beach Brands (HBB)
Hamilton Beach Brands (NYSE:HBB) was spun-off from Nacco Industries (NYSE:NC) in October 2017. Since the spinoff, both stocks have underperformed with HBB losing 36% of its value and NC flat over the past 11 months.
Hamilton Beach sure gets a lot of business through Amazon. Its food processors and hand mixers are some of the e-commerce giant’s bestselling kitchen essentials.
The problem for Hamilton Beach isn’t its products. The problem is its Kitchen Collection retail shops, which have seen revenues decline by 14.5% in the first six months of the year generating an operating loss of $8.1 million versus an $8.4 million operating profit from Hamilton Beach.
Until the company can find a private equity buyer for the retail stores, it will continue to keep costs down and gross margins up, while closing as many non-productive stores as possible.
Buy now while the stock is cheap because one of two things will happen in the next 12-24 months: It will sell Kitchen Collection, or it will rightsize the business and return to profitability.
I realize that’s a big ask, but when you’re looking at 36% off, the reward is worth the risk, in my opinion.
Black Knight (BKI)
Black Knight (NYSE:BKI) was spun-off from Fidelity National Financial (NYSE:FNF) in October 2017. Both stocks have ripped it up in the 12 months since separation with Black Knight up 94% and its parent an impressive 45% over the same period.
If you were a Fidelity National Shareholder, I hope you kept your Black Knight shares.
The company, which specializes in data analytics for the mortgage industry, launched its Actionable Intelligence Platform in August, a service that not only provides the data but allows customers to make better decisions.
In fiscal 2018, Black Knight expects top-line revenue of at least $1.1 billion and adjusted EBITDA of at least $530 million.
Currently trading around 31 times its adjusted earnings-per-share forecast for the year of at least $1.73 a share, you might want to wait until it backs up a little into the $40s.
Long-term, I like the fact that 62% of its customer base are the 100 largest banks in America. I also like that its operating margins are almost 50% and have grown by 21% over the past five years.
If you’re looking for a company with slow and steady growth, Black Knight is it.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.