Spin-off stocks have been in the limelight in recent weeks.
For instance, Johnson & Johnson (NYSE:JNJ) recently announced it will spin off its consumer health division and instead focus on pharmaceuticals and medical devices. Similarly, General Electric (NYSE:GE) announced plans to separate into three different companies, focusing on aviation, health care and energy.
A stock spin-off takes place when a public company divests itself of one (or several) of its units, which becomes a separate company. Recent research by Emilie R. Feldman of the University of Pennsylvania highlights: “These deals are thought to create shareholder value in a number of ways — by separating unrelated businesses and reducing complexity … by improving the focus of managerial and financial resources … and by reducing information asymmetry and clarifying capital market perceptions.”
Spin-off stocks may particularly be lucrative for shareholders in legacy businesses. After all, it’s as close as it ever gets to a “buy one, get one free deal” in the stock market. Companies generally prefer spin-offs to unlock value by detaching non-core businesses. The Street typically regards spin-off stocks to be worth more as separate entities compared to when they are part of a larger company.
A Credit Suisse study analyzes spin-off performance between 1995 and 2012. In the first 12 months after the spin-off date, divested companies outperformed the S&P 500 index by 13.4%. In addition, Deloitte and Edge Consulting Group research indicates that spin-off stocks generated a 22% return in their first 12 months of trading between 2000 and 2014, outperforming the 14% return of their parents over the first year.
But remember that investing in spin-off stocks only makes sense if you can stomach some volatility. Here are three spin-off stocks that could gain momentum and outpace their parents in the coming months.
- Brookfield Asset Management Reinsurance Partners (NYSE:BAMR)
- Kyndryl Holdings (NYSE:KD)
- Organon (NYSE:OGN)
Spin-off Stocks: Brookfield Asset Management Reinsurance Partners (BAMR)
Brookfield Asset Management Reinsurance Partners operates a reinsurance business. It provides annuity-based reinsurance products to insurance and reinsurance companies and is a direct issuer of pension risk transfer products for pension plan sponsors. On June 28, Brookfield Asset Management (NYSE:BAM) and Brookfield Asset Management Reinsurance Partners announced that management had completed the previously announced creation of Brookfield Reinsurance.
BAMR released Q3 results on Nov. 11. Total revenue came in at $2.27 billion, up from $114 million in the same quarter a year ago. Funds from operations stood at $3 million, driven by positive spread earnings on pension risk transfer business. The company generated a net loss of $6 million. Cash and equivalents ended the quarter at $406 million.
“Since we last reported, we have closed on a number of reinsurance and pension risk transfer opportunities, increasing our assets under management to $8 billion,” CEO Sachin Shah said.
During the quarter, BAMR agreed to reinsure $1.6 billion of deferred annuities. In addition, it announced a bid to acquire 100% of American National Group (NASDAQ:ANAT). BAMR is expected to hold roughly $40 billion of insurance assets under management after the transaction.
BAMR shares started trading on June 28 at $85 per share. They currently are just over $60 while trading at 3.6x trailing sales. Interested investors could find value around these levels.
Kyndryl Holdings (KD)
New York-based Kyndryl offers tech services that help large businesses manage their infrastructure operations. On Nov. 3, IBM (NYSE:IBM) completed the spin-off of its managed infrastructure services business to Kyndryl. IBM’s shareholders have received new shares equivalent to 80.1% of Kyndryl, while IBM has retained a 19.9% equity stake.
According to Kyndryl’s regulatory filings with the U.S. Securities and Exchange Commission, it made $19.4 billion in revenue in 2020. However, revenue has been declining for several years.
In fact, for the quarter ended June 30, net loss came in at $393 million. A year ago, it had been $373 million. And profit margins for Kyndryl, the largest IT infrastructure provider globally, are expected to remain depressed in the short term.
Yet management aims to grow the ecosystem. The company is swiftly forging new partnerships in the managed technology services space. For instance, ABM Amro (OTCMKTS:AAVMY) recently announced a $400 million tech services deal with Kyndryl. Wall Street expects to see more partnerships to sell IT services and technologies especially for cloud and artificial intelligence.
Kyndryl’s profitability might improve in the coming months, but it is not expected to generate excess cash for buybacks or dividends. KD stock is at $18 and has fallen more than 13% in the last five days. KD shares currently have a cheap valuation, trading at only a quarter of trailing sales.
Spin-off Stocks: Organon (OGN)
Jersey City, New Jersey-based Organon is a global pharmaceutical company. In June, Merck (NYSE:MRK) finalized the creation of Organon from its Women’s Health, Biosimilars, and Established Brands divisions.
Organon released Q3 results on Nov. 11. Total net revenue came in at $1.60 billion, representing a decline of 1% from a year ago. The company generated $424 million in non-GAAP adjusted net income, or $1.67 per diluted share, down from $604 million, or $2.38 per diluted share, in the prior-year quarter. Net debt stood at $8.29 billion. Cash and equivalents ended the quarter at $1 billion.
“Just months after becoming a standalone company, we are delivering on what we set out to do,” CEO Kevin Ali said. “Our year-to-date results are very much in line with expectations, and with good visibility into the remainder of the year, we are affirming our financial guidance.”
The Established Brands segment faces declining revenue due to loss of patent exclusivity. Women’s Health and Biosimilars divisions are forecast to drive mid-single-digit organic growth in the long term. Organon maintained its 2021 revenue guidance of $6.2 billion to $6.3 billion.
OGN stock hit a high of $38.75 in late May before plunging to $27 territory in early June. Shares look undervalued at the current price of $31, offering value for money. They are currently trading at only 1.1x trailing sales.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
