Divide and Conquer: 3 Stock Spinoffs Set to Trounce the Market


  • Spinoffs often provide great investment opportunities because they are initially unloved by the market.
  • Solventum (SOLV): The healthcare operations of industrial conglomerate 3M (MMM) will rise as it pays down its debt.
  • Kenvue (KVUE): The largest consumer health pureplay, the offspring of Johnson & Johnson (JNJ) owns some of the market’s best-known brands.
  • W.K. Kellogg (KLG): This 100-year-old cereal maker is one of the biggest players in the biggest food category for breakfast.
Stock Spinoffs to Buy - Divide and Conquer: 3 Stock Spinoffs Set to Trounce the Market

Source: Faizal Ramli/Shutterstock.com

Too often spinoff stocks don’t perform well out of the gate. Because an investor bought the business of the parent company, he doesn’t care too much about whatever side project is being shed. When the spinoff stock shows up in his account, he sells it and banks the “free” cash.

However, investing legend Joel Greenblatt says spinoffs are actually a great buying opportunity. In his classic investing book, “You Can Be a Stock Market Genius,” Greenblatt says because the discarded unit was never able to be properly valued inside the larger corporation, once free it can devote appropriate resources to grow the business. It also helps investors more accurately value the business.

Below are three spinoffs that occurred within the past year. Let’s see whether the market is appropriately valuing these businesses and whether they are stock spinoffs to buy now.

Solventum (SOLV)

3M logo on top of a corporate building. MMM stock
Source: JPstock / Shutterstock.com

One of the most recent spinoffs completed, Solventum (NYSE:SOLV) is the healthcare business of industrial conglomerate 3M (NYSE:MMM) that was unleashed on Apr. 1. It is one of the largest providers of sterilization devices, dressings, tapes and other consumables used by healthcare facilities. Solventum had approximately $8.2 billion in 2023 sales and operates in four business segments: medical surgical, dental solutions, health information systems and purification and filtration.

The company just issued its first earnings report as a standalone business. Sales were up 0.2% to $2 billion with adjusted earnings of $2.08 per share. More than half of sales came from the medical surgical business that sells dressings and surgical equipment. Solventum stock, though, hasn’t caught on yet. Shares began trading at around $69 each and promptly fell. Currently, they fetch less than $63 a stub, a 9% loss. That could be because of the heavy debt load 3M loaded Solventum with, some $8.3 billion. But management says its focus is paying down that figure over the next 24 months.

That suggests investors have a good opportunity to buy into this stockbefore it trounces the market.

Kenvue (KVUE)

A red Johnson & Johnson (JNJ) sign hangs inside in Moscow, Russia.
Source: Alexander Tolstykh / Shutterstock.com

Kenvue (NYSE:KVUE) was the consumer products business inside Johnson & Johnson (NYSE:JNJ). After the pharmaceutical giant decided it wanted to focus more narrowly on its healthcare operations, it shed Kenvue exactly one year ago. Its stock has also not fared well as shares are down about 24% since the separation.

While Solventum’s products are not likely known to most consumers since it sells primarily to institutions, that’s not the case for Kenvue. It owns a portfolio of some of the biggest, best-known consumer health brands on the market, including Tylenol, Listerine, Motrin, Zyrtec, Benadryl and Band-Aid. Having such brand names gives it pricing power, which it has used effectively, even in a rising inflation environment.

As the world’s largest pure-play consumer health company by revenue, it generates $15 billion in annual sales. First-quarter sales of $3.9 billion were up 1.1% because of pricing as volumes declined. Much of the falloff, though, was due to inventory being built up last year making comparisons difficult.

Kenvue stock, though, should be seen as a buy. Consumers will turn to trusted names even in a recession and this company owns some of the best. And with a dividend pedigree inherited from Dividend Aristocrat JNJ, investors can get paid while waiting for the u-turn.

W.K. Kellogg (KLG)

Kellogg's sign on their Canada's head office building in Mississauga
Source: JHVEPhoto / Shutterstock.com

There is a good chance you ate this company’s products for breakfast this morning. W.K. Kellogg (NYSE:KLG) is the cereal company you grew up with and which has been in business for well over 100 years. 

Parent Kellogg spun off the iconic company last October because it viewed cereal as a slow-growth business. It changed its own name to Kellanova (NYSE:K) with a focus on snack foods and has some well-known brands of its own, including Pop-Tarts, Cheez-Its, Pringles and Eggo waffles.

W.K. Kellogg owns a portfolio of iconic brands, such as Frosted Flakes, Corn Flakes and Froot Loops. Unfortunately, cereal consumption is on the decline.

During the pandemic industry cereal sales rose 5.2% but tumbled 8.7% in 2021 before settling into its long-term range of contraction of around 4% in 2022. Cereal is still the biggest breakfast food with about a 20% share but has been steadily declining for years. There is a fight for market share amongst the three cereal companies with General Mills (NYSE:GIS) leading the way but closely followed by W.K. Kellogg and Post Holdings (NYSE:POST) coming in third.

Still, W.K. Kellogg stock has been a star despite the supposed secular decline in its business. Shares are up 60% this year and 53% since they began trading last fall. The stock had fallen right out of the gate but I noted at the time it was a stock to buy. Even with the gains, W.K. Kellogg can still trounce the market going forward.

On the date of publication, Rich Duprey held a LONG position in MMM, SOLV and JNJ stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

Article printed from InvestorPlace Media, https://investorplace.com/2024/05/divide-and-conquer-3-stock-spinoffs-set-to-trounce-the-market/.

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