Saturday, March 5, 2011
You Can Be A Stock Market Genius: Chapter 3
Posted by Saj Karsan
In this chapter, Greenblatt explores the world of spin-offs. The first point he makes is that spin-offs themselves generate above-average returns for investors. There are many logical explanations for this phenomenon, including the fact that owners of the parent company don't often want the spin-off as it may not be in the right industry or may not be of a size consistent with the investment mandate. This causes a sell-off of the spun-off company, resulting in an abnormally reduced price. As a result, investors tilt the odds in their favour just by venturing into this area.
With a little more work, investors can enhance even the already high returns that accrue to spin-offs by picking their spots, Greenblatt argues. He takes the reader through several examples of spin-off opportunities where prices appreciated strongly in subsequent periods due to market inefficiencies.
There were several recurring themes in the examples. Greenblatt looks for spin-offs where insiders own a lot of the stock of the new companies. He argues that managers will set themselves up for big returns, and so potential shareholders should look to align themselves with managers when possible.
Greenblatt also advises readers to look at the parent company of a spin-off as well. During partial spin-offs, for example, parent companies can trade at very low values relative to their ownership in the spun-off company.