Data Is In: Spin-offs Beat The Market

• Cantor Fitzgerald research has shown that spin-offs outperform the broad market in their first year of trading.
• The best time to buy spin-offs is typically within the first week of trading.
• Parent companies enjoy spin-off benefits, including higher margins, larger growth and higher multiples.

In a new report, Cantor Fitzgerald analyst Steve Ferazini takes a close look at spin-offs and runs through the numbers on their historical performance. Ferazini found that spin-offs typically outperform the market by a wide margin in their first year of trading.

What’s going on?
According to the report, spin-offs completed between 2009 and 2013 outperformed the S&P 500 in their first year of trading by an average of more than 17 percent. Ferazini identifies several factors that seem to be contributing to this outperformance.

“These factors include spin-off exclusion from the S&P 500, the ability and willingness of the spin-off company’s board and management to repurchase shares, and users of the cash contribution from the spin-off to the parent,” he explains.

Buying the dip
For investors looking for the best possible time to buy spin-offs, look no further than their first week of trading. Ferazini found that more than 62 percent of spin-offs trade down during their first six trading days.

Outlook
Cantor Fitzgerald believes that 2015 may be mark the peak for tax-free spin-offs, but it does not expect a dramatic reduction coming in 2016. Too many companies recognize the potential benefits of a spin-off to the parent company, including higher margins, better growth and a higher multiple.

For traders looking for spin-off-related stocks to play, Cantor Fitzgerald has Buy ratings on Barnes & Noble, Inc BKS, Gannett Co Inc GCI, KLX Inc KLXI and MSG Networks Inc MSG.

Disclosure: the author holds no position in the stocks mentioned.