How to Buy Spin Off Company Stocks
Stock spin-offs often provide a reasonable and efficient method to trade equities with promising prospects. Spin-offs occur as a company's focus narrows, tax considerations make spin-offs attractive, regulatory issues arise, or because management feels the market is under-weighting the contribution of a division to the valuation of the company as a whole. There are several techniques to buying spin-offs.
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Instructions
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Learn that a stock spin-off takes place for many reasons. There may be strategic reasons where companies are required by regulatory considerations to divest themselves of divisions they own. Understand that in a pure spin-off a company divests 100 percent of the ownership of a company to the shareholders in the form of a stock dividend. Usually the divestiture is between 20% and 80%. There are usually about 50 spin-offs of publicly traded companies each year.
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Develop a set-up or list of conditions that lead you to a stock that is or will be spun off. Read financial periodicals such as the Wall Street Journal, Forbes, and Business Week that regularly report on corporate strategic moves. All details of spin-offs of publicly traded companies must be revealed publicly.
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Use fundamental analysis to understand the new company. Once you have found a spin off announcement, follow the details of the spin-off by researching and reading Security and Exchange Commission (SEC) filings. Create a pro forma (new company) balance sheet and projected earnings of the new company. Compare the spin-off to the competition. Understand the industry being served.
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Use technical analysis to track new spin-offs. Use mathematical techniques such as a new 52-week high in the stock, an explosive growth in volume following a surprise jump in earnings, the development of an important trading pattern such as the cup and handle, or a high annual return on equity. It's important, once the stock has been found, to have a trading plan.
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Trade the opportunity with a plan. At the time of purchase, place an irrevocable trading stop where you will not take on more loss if the trade does not go your way. Buy a variety of spin-offs over time in different technologies and industries so as to diversify risk. Further diversify risk by owning other stocks purchased with other sound methodologies. Know what features will cause you to sell a stock. Stick to a plan. Remember that your trading to make money, not to be right.
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Consider the purchase of the parent company of the spin-off if you like the parent and the new company as well. When the split occurs both the parent and the spin-off will rise in value. The spin-off rises because of its new, focused objective and management team; the parent company rises because they have retained substantial ownership in the spin-off.
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Tips & Warnings
Get at least two sources for any data you deem important enough to invest on. Fast moving events often change circumstances of a deal.
Never trade stock spin-offs until you have practice traded a few spin-offs.
References
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