I got the idea for this article on stocks to buy while following L Brands’ separation of Victoria’s Secret (NYSE:VSCO), the lingerie retailer that’s been reduced to a former shadow of itself. Of course, I don’t think VSCO can outperform Bath & Body Works (NYSE:BBWI), the surviving business from Leslie Wexner’s former empire, but the news did make me consider which spinoffs might be able to give their parents a run for their money.
A long time ago, I read Joel Greenblatt’s You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. Spinoffs were one of the special situations that Greenblatt covered in his book. Because of that, I continue to search for special situations to this day.
However, with the advent of the internet and Reddit, finding diamonds in the rough can be much harder. As a result, there’s an argument to be made that, in 2021 more than any other time in investing history, index funds may be your best bet.
Still, for those who have a little curiosity left in the tank, here are seven spinoffs that could outperform their parents in the years to come.
- International Flavors & Fragrances (NYSE:IFF)
- Viatris (NASDAQ:VTRS)
- GXO Logistics (NYSE:GXO)
- Vimeo (NASDAQ:VMEO)
- Cognyte Software (NASDAQ:CGNT)
- Topiscus.com (OTCMKTS:TOITF)
- Apartment Income REIT (NYSE:AIRC)
Stocks to Buy: International Flavors & Fragrances (IFF)
Spinoff return since separation: 6%
Parent return over same period: -13%
In December 2019, International Flavors & Fragrances announced that it would merge with Dupont’s (NYSE:DD) nutrition and biosciences unit in a merger worth $26.2 billion.
The merger finally closed on Feb. 1, more than 13 months after the announcement was first made. Moreover, the combined businesses were poised to have 2020 revenue of more than $11 billion and $2.5 billion in EBITDA (earnings before interest, taxes, depreciation and amortization). As a result of the transaction, Dupont shareholders owned 55.4% of the new IFF, while IFF stock shareholders held 44.6%. As part of the deal, IFF also paid Dupont a $7.3 billion cash payment.
Since then, IFF has reported second-quarter results. The combined sales of the two businesses increased by 13% during the quarter. Excluding currency, they were up 9% year-over-year (YOY) to $3.09 billion (Page 2).
On top of this, free cash flow (FCF), was $930 million over the trailing 12 months (TTM) through the end of June. That means IFF has an FCF yield of 2.65% — a little pricey for my liking — but I don’t think you can argue with the company’s performance so far.
Ultimately, this could be a win for both groups of shareholders. But, for now, IFF stock is beating its parent as one of the stocks to buy.
Spinoff return: -12%
Parent return: 21%
The process to merge Pfizer’s (NYSE:PFE) Upjohn business with Mylan began in earnest in July 2019, when the parties announced that the business combination would see Pfizer shareholders own 57% and Mylan shareholders hold 43%. Ultimately, this merger was completed on Nov. 16, 2020. Now, the new firm operates as Viatris.
This health care company reported extremely positive Q2 2021 results on Aug. 9. On the top line, it had revenues of $4.58 billion with growth across its operating units and regions. On the bottom, its adjusted EBITDA was also 91% higher YOY at $1.68 billion.
For full-year 2021, Viatris now expects $17.7 billion in sales at the midpoint of its guidance, $6.3 billion in adjusted EBITDA and $2.3 billion in free cash flow. All of these projections are higher than the previous guidance.
Back in May, executive chairman and longtime Mylan executive Robert Coury made headlines when it was announced that his compensation was $29.06 million in 2020. This included a $10 million cash bonus. Clearly, it pays to execute a merger successfully.
Given Pfizer’s success with its Covid-19 vaccine, it’s understandable that the company is beating its former stablemate, VTRS stock. However, I think that can change in 2022 and beyond for this pick of the stocks to buy.
Stocks to Buy: Gxo Logistics (GXO)
Spinoff return: 26%
Parent return: 4%
Investors first got wind of XPO Logistics’ (NYSE:XPO) plan to spin off 100% of its logistics segment in early December 2020. The intention was to create two pure-play industry powerhouses — one providing less-than-truckload (LTL) and truck brokerage services and the other providing contract logistics services to companies around the world. On Aug. 2, 2021, the company completed the spinoff, with XPO shareholders receiving GXO stock on a one-for-one basis.
On Marketwatch, 13 analysts cover GXO stock. They give it an Overweight rating and a median target price of $90, providing more than 7% upside at current prices. For comparison, 20 analysts cover XPO stock. They give it a Buy rating with a median target price of $105.50, providing upside of around 26% today.
In the company’s latest earnings, GXO had TTM revenues of $7.05 billion, operating income of $220 million and FCF of $50 million. However, once the company gets past the first year, its numbers ought to improve dramatically. At its Investor Day presentation back in July, CEO Malcolm Wilson articulated why GXO is such an attractive investment to consider:
“We benefit from three massive, secular tailwinds: the growth of e-commerce, the demand for logistics automation and outsourcing. We have long-tenured contractual relationships with blue-chip customers, primarily in consumer-focused verticals [and] critical scale in a growing market […]”
From a price-to-sales (P/S) perspective, the market is valuing this pick of the stocks to buy at a multiple that’s around three times its former parent. I don’t think that will change anytime soon.
Spinoff return: -35%
Parent return: -20%
Next up on this list of stocks to buy, IAC (NASDAQ:IAC) is widely known for being spinoff-happy. That’s because it’s one of the company’s best ways to extract value from its various media-related assets. In December 2020, when IAC first announced it would spin off Vimeo, IAC stock jumped by more than 16%.
IAC completed this spinoff on May 25, 2021. As the company’s 11th one, IAC estimates that it has created $100 billion in shareholder value over the past 25 years, with spinoffs doing much of the work. IAC shareholders received 1.6235 shares of Vimeo for every share held in the parent. CEO Joey Levin said the following on the deal:
“The evolution of Vimeo into a thriving independent public company is the embodiment of the IAC way […] We are enormously grateful to all the brilliant people, beginning with Jacob Lodwick many years ago, who’ve made this journey possible. Now we get back to our favorite part—building the next one.”
On Sept. 13, this video software platform — with more than 200 million users worldwide — reported August metrics. Revenue was 33% higher than a year earlier. In addition, subscribers grew by 15% in the month while ARPU (average revenue per user) increased by 15% last month.
While this company will continue to provide monthly numbers for investor transparency, it will also continue to focus on long-term value creation for all its stakeholders.
Investors might not have liked the August numbers. However, Vimeo’s latest quarterly report ended Jun. 30 saw its revenues increase 43% to $96.05 million. In addition, the company finished the first six months of the year with ARPU of $237, up 25% from a year earlier.
If you own VMEO stock, I would not be in a rush to sell. Although it’s down, 2022 is looking like a good time for a rebound.
Stocks to Buy: Cognyte Software (CGNT)
Spinoff return: -3%
Parent return: 13%
Verint Systems (NASDAQ:VRNT) announced that it would spin off its security analytics software business in December 2019. The company then completed the spinoff of Cognyte Software on Feb. 2, 2021, just after the close of its previous fiscal year. At the time of the announcement in 2019, Verint felt the two businesses would benefit from being independent pure plays. CEO Dan Bodner said the following at the time:
“With our customer engagement business approaching $1 billion in annual revenue and our cyber intelligence business approaching $500 million in annual revenue, we believe the two independent, publicly traded companies will both benefit from the separation and be well positioned to pursue their own strategies, drive opportunities to accelerate growth and extend their market leadership.”
The pure-play argument is a common one amongst spinoffs. It gives a business a better focus. However, sometimes — and especially amongst larger businesses — a unit can get lost in the crowd.
For Q1 2021, Cognyte reported 12.3% sales growth to $115.2 million as well as a 66% increase in adjusted EBITDA to $21.1 million. The company believes that its addressable market is an estimated $30 billion annually, growing at 10% per year. For the period, 89% of the company’s revenue was generated from its software. As a result, its gross margin jumped by 400 basis points to 73% on a non-GAAP basis.
Right now, six analysts cover CGNT stock. All of them give it a Buy rating, with a median target price of $40. That’s a lot of potential upside for this pick of the stocks to buy.
Spinoff return: 121%
Parent return: 34%
Next up on this list of stocks to buy is TOITF stock. Back in May 2020, Constellation Software (OTCMKTS:CNSWF) announced that Total Specific Solutions (TSS), one of its six operating groups, would acquire 100% of Topicus.com, a diversified vertical market software provider based in the Netherlands. Once completed, Constellation planned to spin off the Topicus.com business into its own publicly traded independent company.
This spinoff occurred on Jan. 5, 2021. As a result, Constellation shareholders received 1.8598 shares of TOITF for every share held in the parent. All in all, Topicus.com will act as the platform for growth in the European vertical software market in the months and years to come. CEO Daan Dijkhuizen said the following about the arrangement:
“We are delighted that the intended combination of Topicus and TSS into Topicus.com is now a fact. A promising combination is born. As stated in May 2020, we see TSS as the designated partner to fulfil our further growth ambitions in Europe.”
Much like its former parent — which has completed more than 500 acquisitions over the years — Topicus.com will act as a software consolidator in Europe. What’s more, Hillside Wealth Management portfolio manager Jason Del Vicario sees promise here.
“I have a sneaking suspicion that if we look back in ten years Topicus will outperform Constellation Software, and there’s a whole slew of reasons for this […] we have kept the Topicus shares that we were given and we would love to add to the position.”
So, all told, you can look for TOITF to find success in the near future.
Stocks to Buy: Apartment Income REIT (AIRC)
Spinoff return: 31%
Parent return: 58%
Apartment Investment and Management (NYSE:AIV), also known as Aimco, first introduced the idea of spinning off its multi-family apartment buildings into a publicly traded, self-managed REIT (real estate investment trust) back in September 2020. It then completed the spinoff on Dec. 15, 2020. As a result, AIV shareholders got AIRC stock on a one-for-one basis. Primarly, the move was made so that Aimco could focus on its development and redevelopment opportunities.
Since then, this REIT finished Q2 with 96 apartment communities and 26,422 apartment homes. It generates average revenue of $2,220 per apartment home (Page 27).
What’s more, AIRC acquired a 700-apartment home community in Pembroke Pines, Florida, for $223 million during the quarter. Once it invests $10 million in capital enhancements on the property, it expects to generate approximately $13 million in net operating income annually.
AIRC has nine or more apartment communities in six different U.S. locales, including Los Angeles, Boston, Washington, D.C., San Diego, Philadelphia and the Bay Area. Multi-family remains one of the more attractive long-term REIT plays out there. So, if you’re looking for stocks to buy, AIRC stock may be one of your better options.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.