If you choose to invest in stock spin-offs, you will be in good company. Peter Lynch, who famously generated 29.2% annual returns while managing Fidelity’s Magellan Fund, wrote in One Up on Wall Street, “Spin-offs often result in astoundingly lucrative investments.”
While they won’t outperform every year, numerous studies show that over the long term, stock spin-offs do quite well.
For example, Credit Suisse found that U.S. stock spin-offs outperformed the market by 13.4% in the first 12 months of trading.
Today, there are four spin-offs that you should consider buying.
Match Group (MTCH) is the leader in the online dating market and was spun off from IAC/Interactive (IAC) earlier this year.
The company owns and operates several different online dating products and services, including Tinder, Match, Plenty of Fish, okCupid, Hinge, and more.
In recent years, the online dating industry has absolutely exploded. The stigma around meeting romantic partners on the internet has faded and will continue to do so. And the pandemic hasn’t dampened interest in meeting romantic companions online.
As such, I expect the number of people paying for online dating services to continue to grow.
Match Group is the market leader in an industry in secular growth.
While the stock looks expensive at 44x forward earnings, stocks of companies in secular growth never look cheap. I expect Match Group to stay “expensive” for many years to come.
ChampionX Corp (CHX) was formed when its parent company, Ecolab (ECL), decided to spin off its oil and gas chemical business and merge it with another oil and gas company, called Apergy.
While ChampionX is in the energy industry (which is challenged right now), it is relatively well positioned.
ChampionX is focused on providing equipment and chemicals to oil and gas drillers. A key advantage for the company is that 84% of revenue comes from production of wells that have already been drilled and completed. As such, the company is not as dependent on new wells being drilled.
From a valuation perspective, ChampionX is dirt cheap, trading at ~5.0x trailing free cash flow.
The company will stay cash flow positive even in a challenging period like today and could trade multiples higher if (when) energy stocks recover.
Fox Corporation (FOX) is a 2019 spin-off from 21st Century Fox. In a cord cutting world, it is relatively well positioned due to its focus on live news and sports, which continue to draw large, engaged audiences that are appealing to advertisers.
FOX’s live news and sports focused portfolio provides it with leverage in upcoming negotiations with pay TV operators and affiliate stations; this leverage will result in higher affiliate payments, which will drive strong revenue and free cash flow growth for the foreseeable future.
Despite FOX’s enviable position and robust growth outlook, FOX is very cheap, trading at 8.3x trailing free cash flow.
Kontoor Brands (KTB) is a 2019 spin-off of VF Corp (VF).
It is an apparel denim company whose brands, Wrangler and Lee jeans, are highly popular and recognizable.
Prior to the spin-off, VC Corp did not invest in the Wrangler and Lee brands, as focus was on faster growing apparel brands such as North Face, Timberland, and Vans.
Now that Kontoor Brands is an independent company, management has a wonderful opportunity to go after low-hanging fruit.
To provide just one example, the company is extremely under indexed in its t-shirts business. Kontoor Brands sells 500 pairs of jeans for every t-shirt. In contrast, some of its competitors sell five t-shirts for every pair of jeans.
KTB plummeted when the company cut its dividend to preserve liquidity during the depths of the pandemic. However, management is adamant that the dividend could be reinstated as soon as the fourth quarter. This would be a meaningful catalyst as all the dividend income funds that sold the stock will have to buy it back.
From a valuation perspective, Kontoor Brands is cheap, trading at 12.5x forward earnings and 8x normalized earnings.