Hidden Public Offerings
We all know Wall Street is playing with a rigged deck. And you can’t find a more crooked game than with IPOs. Yes, Wall Street — and the financial media — loves the idea of taking hard-earned money and using it to gamble in the hope you’ll end up owning the next Amazon or Google.
Last year, it was the hype around LinkedIn and Groupon. This year, it’s Facebook. Chances are you’re gonna get suckered. On average, studies have proven IPOs underperform the market by 30% in the three years after going public.
Here’s just one example: LinkedIn.
If you participated, you saw the share price climb as high as $122 on the very first day, before settling to $94 and a quarter. That’s a big jump from the $45 entry price.
However, most individual investors couldn’t see those gains. Institutions get first crack at IPOs. Those who jumped in after Day 1 have seen days of major disappointment when the stock traded as low as $59 and climbed back to only where it was bought at. So much for all the excitement…
IPOs mean buying something the insiders no longer want at a price they’d never pay.
Let’s not spend our valuable time lurking about in these statistics in The Journal of Finance. I see far better deals out there in the public offering markets right now. Allow me to share with you the one class of public stock offerings that I think are worth your time and initial investment.
You probably don’t hear about these — even though they routinely beat the S&P 500.
From 2002-March 2012, an index tracking this class of offerings beat the overall market by 226%. Look at recent history and you’ll find companies like American Express, Home Shopping Network and Marriott Hotels directly involved in these deals.
But despite these incredible returns, these offerings get none of the “hype” of IPOs. That’s why I call them “Hidden Public Offerings” (or HPOs)…
They’re hidden because they just don’t get the press that IPOs do, but they’re a great way to exploit inefficiency in the market to help you outperform in your stock portfolio.
How Do Hidden Public Offerings Work?
When company insiders want to maximize the value of an asset they own, they may chose to do so by “splitting off” a section of their business into a wholly separate business. You can buy shares in that new business. This is referred to as a spinoff or Hidden Public Offering.
I consider spinoffs to be hidden because they don’t jump off the investment shelves the way IPOs do. Often, the asset itself is “hidden” on the balance sheet of a company; it’s not the main item that attracts present shareholder interest. Yet the asset will have a real value on the open market (often not the same value it holds on the parent company’s balance sheet). A spinoff helps “discover” the true value of that asset.
There are several benefits to the company (and present shareholders in the parent company) when a new business is spun off of the old. The parent company and its shareholders retain equivalent shares in the new company. They can buy or sell the new shares as they please. New investors can get into the new company at a price they might not have paid for the parent company.
How Can I Track Spinoffs?
If you want to track these stocks as a group, follow the Bloomberg U.S. Spin-Off Index. You can find it under the ticker BNSPIN.
But there’s no super-secret spinoff “tip sheet” that shows you what stocks are planning on spinning off assets in the next, say, 12-36 months. That’s why Mayer’s Special Situations exists, to point out such choice one-time events to readers as these Special Situations develop. It’s not as if I can say to you right now here are the spinoffs, here are the dates, the tickers, have at it! It takes time and research and sleuthing… That’s what a balance sheet detective like me does best.
I sniff out assets that could benefit in the case of a spinoff. I also do as much due diligence on the CEO and the big company directors and other insiders as I can. I’ll even ring a CEO up on the phone. He won’t be able to tell me if there’s a spinoff in the works… but many times, you will find the suggestion or hint of these kinds of value-creating shareholder actions in a public SEC filing or quarterly conference call.
Even if you did have an advance “peek” at the Hidden Public Offering list of spinoffs, you still need to vet out the candidates for investment. As with IPOs, not all companies are good bets to take.
My excitement for spinoffs depends on what price the new company starts trading at and the particulars of the deal. The form I need to see for that is the S-1.
One spinoff to watch out for is one in which the company is spinning off an undesirable legacy business that just might not have a future they want to be a part of.
A case like this is Loews Corp. (NYSE:L). I like Loews because I like the Tisch family, a dynasty begun in true American fashion just after World War II. The Tisch brothers paid out $375,000 for an old New York hotel with help from their parents. They went on to snap up hotels in Atlantic City and Manhattan. In 1968, they acquired Lorillard Tobacco, using that steady cash flow to fund other operations and, most importantly, smart acquisitions. By 1995, you could have found the Tisch brothers on the Forbes 400 list of wealthiest Americans, at $1-2 billion net worth. Loews, their main investment vehicle, continues to deliver solid returns to this day. If you’d put just $1 into Loews in 1959, it’d be worth over $1,622 today. And that’s not even accounting for the dividends Loews paid out over the years.
They follow three simple investing rules:
1. Always assess the downside.
2. Invest in assets, not management.
3. Our day will come.
Now, here’s why I mention it. You can use these same rules to decide why it’s no longer best to keep hold of a business you own. In Loews’ case, the thing to jettison was Lorillard Tobacco.
Lorillard used to be Loews’ cash cow, funding acquisitions during down markets when other assets (like drilling rigs or pipelines) were cheap. But those heady Mad Men cigarettes-in-every-meeting days are long gone. As the legislation changed in America, and as sick smokers started suing, Lorillard became something of a “surprise litigation risk.” It wasn’t a business I liked for Loews down the road, and I was very happy the day they announced they were spinning it off.
Forget IPOs. Luckily for us, we’re in the sweet spot of HPOs.
Joe Cornell, a 15-year veteran in the field and head of Spin-Off Advisors reveals, “I don’t remember the spinoff calendar being this robust. This is going to be the biggest year ever for spinoffs.”
I also think this year could be a record-breaker.
What kind of market are we talking about? Well, 2011’s spinoff values were double what they were in 2010. Back in 2000, the spinoff record was $265.5 billion. That’s the one to beat.
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