When it comes to investing in spinoffs, I’ve learned that timing is everything. Spinoffs present a unique opportunity for investors, but getting the timing right can make the difference between mediocre returns and long-term gains. Over the years, I’ve developed a feel for when to enter and when to hold off, and I want to share what I’ve learned about navigating these opportunities for the best possible outcomes.
Timing Is Key: Understanding the Initial Phase
Spinoffs often go through several phases in the market, and the first phase—indiscriminate selling—is one that I keep a close eye on. Many institutional investors, like mutual funds or pension funds, receive shares of the spun-off company simply because they held the parent company. But those new shares might not fit their investment strategy or mandate, so they sell. This leads to an initial wave of selling that can push the price down, often without regard to the fundamentals of the business.
A good example of this was the spinoff of Organon from Merck in 2021. When Merck spun off Organon, which focuses on women’s health and biosimilars, the market didn’t immediately see the value, and there was significant selling pressure. This wasn’t because Organon was a bad business, but simply because many funds couldn’t or didn’t want to hold the new shares. This created an opportunity for investors who were willing to look beyond the noise and assess Organon on its own merits. Over the following months, Organon’s stock began to stabilize and eventually appreciate as investors started recognizing its steady cash flow and market position.
The Sweet Spot: When to Enter
Based on my experience, the best time to invest in a spinoff is often during the period when the dust is settling. This usually occurs after the initial selling pressure subsides but before the broader market fully catches on to the value of the new entity. It’s important to be patient during this phase—sometimes the market takes a few quarters to understand the real potential of the spinoff.
Take Carrier Global, for instance, which was spun off from United Technologies in 2020. Carrier specializes in HVAC systems, and during the first few months after the spinoff, the stock struggled to gain traction. There was a lot of uncertainty about how Carrier would perform independently, especially in the middle of a pandemic. However, I saw Carrier’s potential due to its strong position in a critical industry, and once the initial wave of uncertainty passed, the company began to outperform. Investors who bought in during that early period of uncertainty saw significant gains, as Carrier’s stock price more than doubled in the following year.
The Long Game: Holding for Gains
The next phase in navigating spinoffs is understanding when to hold on for the long term. Many successful spinoffs take time to fully unlock their potential. Once the management is free to focus solely on growing their specific business, the company often becomes more efficient and innovative. I’ve seen this play out many times—patience is often rewarded.
A great example of this is Siemens Healthineers, which was spun off from Siemens AG in 2018. Initially, the market was cautious, and there wasn’t much enthusiasm for the healthcare technology company. However, Siemens Healthineers had a strong market position and a clear growth strategy, especially in medical imaging and diagnostics. Over the following years, the stock steadily climbed, reflecting the company’s successful execution of its growth plans. Those who held on for the long term were rewarded as the company’s value increased significantly.
Key Indicators to Watch
From my experience, there are a few key indicators to watch when determining the right timing for a spinoff investment:
Initial Selling Volume: Keep an eye on the trading volume during the first few weeks of the spinoff. High volume selling without negative news is often a sign of indiscriminate selling, which can create a buying opportunity.
Management Communication: Listen to what the new management is saying. Are they clear about their vision and strategy? Do they have skin in the game? Management alignment with shareholder interests is a critical factor for long-term success.
Quarterly Performance: Give it a couple of quarters. The first earnings reports post-spinoff are often when you start to see whether the company is on track. If the fundamentals are improving and management is executing well, it could be a sign to buy or hold.
Practical Example: Dow Inc.
When Dow Inc. was spun off from DowDuPont in 2019, the initial reaction was mixed. Many investors were unsure about Dow’s prospects as a standalone commodity chemicals company. The first few months saw a lot of selling pressure, and the stock price struggled. However, once the company began reporting earnings, it became clear that Dow had a solid strategy focused on cost control and efficiency. Over the next year, Dow’s stock began to appreciate as the market recognized its value as a standalone entity with strong cash flow.
Conclusion
Timing is everything when it comes to investing in spinoffs. Understanding the phases a spinoff goes through—from initial selling pressure to stabilization and growth—can help you make better decisions about when to enter and how long to hold. The key is to be patient, look for the signs of indiscriminate selling, and pay close attention to the fundamentals. In my experience, some of the best opportunities come when everyone else is uncertain. By navigating these opportunities carefully, you can position yourself for significant long-term gains.