The legendary investor Peter Lynch once said, “Invest in what you know.” Lynch emphasized the importance of understanding the companies or investments you’re involved in, suggesting that investors will make better decisions if they invest in industries or companies they’re familiar with or have knowledge about.
Lynch’s quote contains a lot of meaning and sense, of course, However, as humans, we shy away from stuff we don’t really understand and often discount names of companies we perceive as plain ‘silly.’
Recently listed corporations are causing a stir with names that deviate significantly from the norm. These names are evocative and attention-grabbing, ranging from “Big Ass Fans,” an industrial fan manufacturer, to “Pumpernickel Pickle,” a company that produces plant-based meat. Additionally, “Lovesac,” a furniture company that specializes in beanbag seats, captures their laid-back brand to perfection. Furthermore, it is impossible to overlook “Bark,Inc.” a company that specializes in everything canine-related, or “Dutch Bros Inc.,” which contributed an eccentric allure to the coffee industry. With “Snowflake Inc.,” for a cloud-based data platform and “Toast Inc.,” for a point-of-sale system, even technology corporations are participating. Whether they are whimsical, descriptive, or simply distinctive, these names are certain to make an impact.
The impact of companies with unusual names is nuanced, with investors’ reactions exhibiting variability. At first, individuals may be skeptical of an unusual name because it may be perceived as lacking sincerity. In industries where innovation is highly regarded, however, distinctive names may also improve brand recognition and memorability, thus potentially functioning as a benefit. Investors continue to regard the company’s fundamentals—including performance, growth potential, and market position—as the determining factor. As the company’s operational success gains precedence, the significance of a name gradually fades. As a result, even though a name’s first impression is important, the fundamentals of the company, as well as industry norms and cultural factors that further shape perceptions, ultimately influence investor decisions.
The above-mentioned companies are easily avoided. Most are recent additions to the market via IPO so you had the choice of buying them or not and assuming you had an idea of what you were buying into, the name probably wasn’t an issue.
Spinoff Stocks
Have you ever woken up to your portfolio to find a new company added to it without knowing where it came from or what it is? The chances are that it came via a spinoff from a company you already owned. You received this new company whether you wanted it or not. A strange concept to many. However, as corporate spinoff events become more mainstream, it’s an area where you should take a closer look because a handful have done exceedingly well in terms of returns. Big names such as General Electric, Johnson & Johnson and Danaher have all spun off and are separately listed companies. GE is shortly about to spin off again and from The Edge’s analysis, it could be a good one.
Spinoff stocks often have strange names to set themselves apart from their parent companies, show that they are innovative, and stand out in a crowded market. For instance, Mondelez International, derived from words connoting worldliness and deliciousness, spun off from Kraft Foods, while Altria Group, suggesting lofty ideals, emerged from Philip Morris Companies. Zoetis, playing on the concept of life, was created by Pfizer, focusing on animal health. Aptiv, indicating adaptability and innovation, originated from Delphi Automotive. Similarly, Arconic, with its non-indicative name, was formed following Alcoa’s split, specializing in precision engineering. These names not only mark a new beginning for the spinoffs but also aim to capture the essence of their renewed business focus, branding strategy, and market positioning, often bearing little resemblance to their corporate origins.
Joel Greenblatt, the well-known value investor, once highlighted the potential of spinoffs in investment strategies, saying, “Spinoffs, in general, beat the market. They beat the market quite handily, on average.”
These names are part of a larger branding strategy that aims to make the new organization stand out, show what it stands for, and appeal to specific groups of people. The difficulty of coming up with a unique name that is both legal and available as a web site adds to the creativity of these names. Even though these names are sometimes seen as “silly,” they were carefully chosen to build a strong, unique brand presence that speaks to the target market and supports the spinoff’s marketing and growth goals.
Worth A Second Look
Investors particularly disregard spinoff stocks for a variety of reasons, in addition to their name. Investors often don’t look at spinoff stocks because they don’t know much about the new company; index funds sell them off right away; investors are focused on the parent company; the stocks have smaller market caps; investors are worried about short-term performance; and investors are naturally risk-averse. Because of these things, analysts and investors pay less attention to spinoffs, which means the market undervalues or ignores them. On the other hand, when parent companies are not limiting them, spinoffs can be more adaptable, focused, and ultimately successful in their niche markets. This oversight can, however, lead to missed opportunities. Smart investors may see value in these spinoffs because they know they can do better and grow.
Performance Of Spinoffs
So, with every reason to sell spinoff stocks, there are many reasons to keep them. Because they focus on specific business strategies and may be undervalued at first, spinoff stocks can be great places to invest. After splitting off from their parent companies, these businesses often do better than the market because they are more efficient, flexible, and open to new ideas. Spinoffs tend to have more connected management with the success of the company, which leads to better decision-making and higher shareholder value. Spinoffs can also be very appealing targets for acquisition, and they often fetch high prices. They may also have good dividend plans, which is good for investors who want to make money.
Studies, including those by well-known organizations like The Edge and JP Morgan, have demonstrated that spinoff companies frequently outperform broader market indices. This trend is particularly notable in the first couple of years following the spinoff. But they might not do well at first because of things like being pushed to sell and not being aware of the opportunity. Spinoffs often create a lot of value over time, thanks to focused management and strategy flexibility. How well they do depends on the business and the situation. Usually, technology and pharmaceuticals do better with them. Parent companies can also show better success after a spinoff. Spinoffs are appealing for mergers and acquisitions, which could mean big profits for owners. Even though there is a chance for big profits, spinoffs come with their own risks, like being smaller and having trouble getting cash. Overall, spinoff companies can offer you above-average returns, but because there are many factors that can affect their success, you should carefully consider their risks versus their potential returns.
Recent Spinoffs
Various firms launched strategic spinoffs in 2023 and early 2024 to streamline operations, focus on core capabilities, or explore new market opportunities. Worthington Enterprises Inc. created Worthington Steel Inc., Voyix Corp. created Atleos Corp., and Sandoz Group Ag split from Novartis AG in 2023, among others. As of January 2024, Flex Ltd spun off NexTracker Inc. Strategic realignments across industries showed a tendency toward corporate reorganization and the establishment of more focused organizations that could grow and better navigate their markets.
Crane Company
Crane Holdings, Co. was split into two publicly traded corporations in the spinoff. Crane Holdings’ aerospace and electronics, process flow technologies, and engineering materials companies were distributed tax-free to stockholders to complete this split. The remaining company, Crane NXT, Co., focused on payment and merchandising technologies. This strategic move allowed Crane Holdings to reorganize its operations and focus on its core skills. The spinoff created two different firms with specialized investment identities and operational foci to unlock shareholder value.
After the spinoff on April 3, 2023, Crane NXT began trading on the New York Stock Exchange as “CXT” on April 4. Crane NXT promoted its strong financial profile, differentiated technology, and core skills to grow shareholder value as a leading industrial technology firm.
Crane Company’s third and fourth quarter statistics reveal strong business division success since the spinoff in April 2023. Despite a poor mix, Crane reported a 7% increase in net sales and a considerable improvement in operating profit margins in the third quarter of 2023 due to strong pricing and productivity. The company boosted and narrowed its 2023 outlook, demonstrating confidence in further growth and profitability.
The fourth quarter had a 10% sales rise and a 38% operating profit improvement from continuing operations. Core revenue growth, Baum acquisition benefits, and favorable foreign exchange impacts boosted the quarter. The acquisition of Vian Enterprises, Inc., in 2024 continued the company’s strong acquisition strategy and integration. Crane announced its 2024 full-year guidance, predicting revenue growth, and raised its quarterly dividend by 14%, demonstrating its strong financial position and hopeful outlook.
After independence, Crane Company’s revenues, margins, and capital management have improved, preparing it for future growth and shareholder value.
ESAB
On April 5, 2022, ESAB Corporation separated from Enovis Corporation (previously Colfax Corporation) and went public. This major relocation focused on welding technology, sophisticated equipment, consumables, specialty gas control, robotics, and digital solutions to exploit ESAB’s fabrication and specialist gas control strengths. In the spinoff, Enovis stockholders received one share of ESAB common stock for every three shares they held, with 90% of ESAB’s common stock handed to them (about 54 million shares).
Since the spinoff, ESAB has had strong financial success. In Q1 2023, ESAB reported net sales of $684 million, up 6% from the previous year. This performance highlights ESAB’s operational success and strategic strategies for sector growth and profitability.
Net sales rose to $664,127 in the fourth quarter of 2022 from $624,215 the year before. Post-separation, the company’s gross profit and operational income increased due to its strategic emphasis and operational efficiency.
Knife River
Knife River became an independent, publicly traded business on the New York Stock Exchange with the ticker symbol KNF on June 1, 2023, when MDU Resources spun it out. This strategy allowed Knife River to focus on its main business of construction materials and contracting, capitalizing on America’s infrastructure expansion. MDU Resources’ stockholders received 90% of Knife River’s outstanding shares, with MDU keeping 10%. This distribution gave MDU Resources owners one Knife River share for every four MDU shares they held on May 22, 2023.
Knife River’s second-quarter revenue rose 30% to $663 million, beating analyst estimates. Net income climbed to $40.6 million from $27.9 million, and EPS was $0.67, above expectations. The record $1.04 billion backlog indicates strong demand and margins. Management noted robust demand in high-growth areas, a focus on aggregate possibilities, decreased debt to 2.3x EBITDA for financial flexibility, and consistent demand and growth post-spinoff.
The Year Ahead
With over 25 spinoffs scheduled for 2024, you are highly likely to receive one by simply holding the parent.
Investing in spinoffs requires rigorous examination because not all are profitable. Some spinoffs can unleash hidden value and have great growth potential, but others may fail owing to poor financials, operational independence, or market conditions. Investors must assess the spun-off entity’s business fundamentals, market position, growth potential, and impact on the parent company. Comprehensive understanding allows educated decision-making, underscoring the importance of due diligence for spinoff investment success.