Boston Consulting Marketing Director

Posted on January 13, 2012 by Admin
Boston Consulting Marketing Director

Boston Consulting Marketing Director

It's every traders' and investors' dream to beat the market, but in practice the vast majority don't. But there is one simple technique, that anyone can use, that has stood the test of time, according to research. It simply relies on buying shares in stock market listed companies that have been spun-off by their parent corporations.

US fund manager Joel Greenblatt in his book You Can Be A Stock Market Genius citing research by Pennsylvania State University (Penn State) says spin-off stocks outperformed the S&P 500 by an average of about 10% a year in their first three years of independence in the 25 years up until 1988. Even the parent companies managed to beat the S&P 500 by a very respectable 6%.

A more recent report covering the period of 2000 to 2005 by investment bank Lehman brothers found that spin-offs beat the stock market by 45% during the first two years, while the parent companies did so by 40%.

The main reason for stock spin-offs is to create value for investors. Very often businesses are worth less than the sum of their parts. Allowing individual businesses to pursue their own destinies often incentivises management and creates corporations that are more specific and easier for investors to understand.

Also, the management of the newly liberated company can fully reap the rewards of their efforts, what better way to awaken their entrepreneurial instincts? Meanwhile, the management of the parent company can focus on improving their core business.

Typically, a spin-off involves the parent company distributing stock in the company to be made independent to its investors. And therein lies the opportunity as described by Greenblatt. He says that a great number of those investors simply dump this new stock. “They are typically sold immediately without regard to price or fundamental value,” he writes. In essence this potentially creates undervalued stock.