Back in April, I had a story on spotting undervalued spin-offs and a related blog post. Now some of those deals have popped onto the market and it’s time to reassess. Keep in mind the advice of sage fund manager John Keeley (of the Keeley Small Cap Value Fund) who said he waits to see if the spin-offs trade down for a few weeks or months. Discover Financial Services (Symbol: DFS) started trading after the July 4th holiday, marking its first appearance at $26.25. Morgan Stanley gave its shareholders one Discover share for every two MS shares they owned. It’s since slipped to under $25 on increasing volume as hoards of Morgan Stanley shareholders who have no interest in Discover have started dumping their shares. Morningstar recently gave it a 5-star rating, saying that the company has a growing business with third-party issuers and a solid debit card network, too.
Another spin-off mentioned back in the earlier story has also started trading. Tyco dumped its electronics and health care units on its shareholders. The healh care unit, called Covidien (COV), got off on a sorta rough note. Management told investors at a June roadshow that Covidien’s net income would decline this year as it increases spending on R&D and replaces some of the functions that had been provided by Tyco. Sales should increase 4% to 6%. Covidien opened around $43 and has since hung around that price.
Perhaps that’s because of an interesting wrinkle on Covidien that could thwart bargain hunters. Because a couple of companies in the S&P 500 Index are dropping out due to LBOs, Covidien is starting its life in the index. That’s not what typically happens to spin-offs and the pressure of index funds selling shares of a spin-off that’s not in an index is what often creates a great buying opportunity (i.e. see Discover above). Tyco Electronics (TEL), also starting life in the S&P 500, opened around $40 and is since down to $39.
I have yet to spot upcoming spin-offs from Temple-Inland (TIN) or American Standard (ASD), so keep your eyes peeled.