Tracking Stock

Imagine a company offering a stock specifically for a high-growth sector of its business. That's exactly what a tracking stock is. These special equities are issued to track the financial performance of a particular segment or division of a company. Tracking stocks trade on markets separately from the parent company's stock. 

Companies may choose to isolate the financial performance of a higher-growth segment. As an investor, choosing tracking stocks can expose you to a specific aspect of a larger company's business.

Purpose

The purpose of tracking stock is to monitor the division’s performance, facilitate mergers and acquisitions, and unlock shareholder value. In many cases, tracking stocks can give investors insight into and access to only the most promising portion of the company. Investors can use tracking stocks to participate in business segments that suit their risk tolerance.

When tracking stock is issued from a parent company, all revenue and expenses of the applicable division are separated from the parent company's financial statements. That means that while part of the parent company, the performance of the tracking stock is tied to the financials of the division or segment, it follows. 

If, for example, that segment is growing while the rest of the company is not, the tracking stock will show growth even when the company stock does not. On the other hand, if the division growth stalls, the tracking stock could fall even if the parent company is doing well.

In addition to isolating successful divisions, large companies may choose to issue tracking stocks to separate a segment that doesn't fit with the core business. However, the parent company retains control of the division's operations. 

Tracking stocks are registered with the U.S. Securities and Exchange Commission (SEC). Then companies include a separate section for tracking stock and the financials of the underlying division in their financial reports.

Investors can treat tracking stocks like any other security, including purchasing options, short-term trading, or a long-term buy-and-hold strategy. Whether you use technical analysis, fundamental analysis, or other assessment techniques such as checking market cap, you should carefully research any tracking stock, its performance, and company financials before investing. 

Types 

Types of tracking stocks include partial tracking stock and targeted stock. Here is an overview of the types of tracking stocks and how they differ: 

Partial Tracking Stock

A partial tracking stock is a minority interest in a subsidiary while the parent company retains control. A minority interest means less than 50% ownership or interest in a company. 

A partial tracking stock trades separately from the parent company's stock.

Targeted Stock

A targeted stock represents a majority stake in a subsidiary. This type of specialized equity tracks the performance of a particular business segment or department. In the case of a majority-owned subsidiary, the parent company owns 51% to 99% of the subsidiary. 

Advantages

There are significant advantages to tracking stocks for both companies and investors. 

Pros for companies:

• Increase in transparency
• Flexible corporate structure 
• Improved valuation
• Tracking stock issuance provides companies with capital to fund growth or pay off debt
• Helps companies get money for specific parts of their business
• Can help companies make money from parts that aren’t doing well

Pros for investors:

• Access more promising divisions of a company
• Performance-based on the tracked segment, not from the parent company as a whole
• Helps investors diversify their investments
• Greater transparency and reduced risk
• Diversification of portfolio

Disadvantages

Tracking stocks offers many advantages but complicates corporate structures and financial reporting. There is potential for conflicts of interest between the parent company and subsidiaries, leading to difficult decisions about resource allocation or management direction. 

Additionally, when companies issue tracking stocks, it can dilute existing shareholder power, as new stocks are issued with new voting rights. 

Regulation

Tracking stocks, like other securities, are under SEC oversight. Companies must meet SEC disclosure requirements and shareholder approval. All companies issuing stock under SEC regulation must submit quarterly and annual reports. 

Applications

Tracking stocks has applications across businesses and sectors. Here are a few examples:

• Conglomerates use tracking stocks to highlight the performance of individual business units within the larger company. 
• Technology firms often leverage tracking stocks to fund and grow innovative divisions. 
• Media and entertainment companies benefit from tracking stocks in managing diverse assets. 
• Companies of all sizes can issue tracking stocks for new divisions unrelated to their core business. 

Accounting and Taxation

When companies issue tracking stocks, they are required to issue separate financial statements for the tracking stocks. Companies must create separate financial statements for each stock so that investors can accurately assess the performance and financial position of the specific department or section. 

This is better for you as an investor as it gives you greater insight into the stock-specific financials and valuation. 

Regarding your tax implications of tracking stocks are treated similarly to common stocks on investors' tax returns. You are subject to capital gains taxes on profits realized from the sale of stocks. For companies, some tax benefits may be based on the structure of the tracking stock issued. 

Challenges

Tracking stocks offers many of the same benefits and risks associated with any stock investment. Tracking stocks on smaller divisions or subsidiaries can face limited liquidity, making it difficult for investors to sell shares or increase trade times. This can present additional challenges in case of high volatility. 

Tracking stocks can present additional complexity, making additional due diligence and understanding essential for investors. Additionally, a company issuing multiple stocks can face a conflict of interest between shareholder groups, other corporate governance challenges, or challenges related to liquidation. 

Notable Examples of Tracking Stocks

Examples of tracking stocks and their parent companies include Comcast Corporation, which issued the Comcast Class A Special Common Stock for the cable business. Disney Company also famously offered its tracking stock Go.com. 

Like the offerings from Comcast and Disney, companies sometimes offer tracking stocks for a period (usually years) before retiring the tracking stock. AT&T Corporation (NYSE: T) also issued the Liberty Media Tracking Stock (Nasdaq: LSXMA).

Other examples of tracking stocks include:

1. General Motors (GM): In the 1980s, GM issued Class E and Class H tracking stocks to track the performance of its Electronic Data Systems (Class E) and Hughes Electronics (Class H) subsidiaries.
2. Sprint Corporation: In 1998, Sprint issued a tracking stock called “PCS” to track the performance of its wireless telecommunications business.
3. Loews Corporation: Loews Corporation has issued several tracking stocks at various times, including Carolina Group, Loews Hotels Holding Corporation, and Diamond Offshore Drilling, Inc.

Frequently Asked Questions