A spinoff that's cutting costs and riding a demographic wave
Anyone who looks at my portfolio of stocks here in CAPS will see that I invest almost exclusively in special situations. I plan on talking about riding the coattails of activist investors and investing in demutualizations in the future because I've found some amazing statistics on the outperformance of those types of investments. Today I want to talk about investing in spinoffs.
A fairly recent study by Credit Suisse concluded that over the past seventeen years spinoffs have beaten the S&P 500 index by 13% during their first year as public companies. Another recent study found that the stock of spun off companies outperforms their former parents by 20% over the next three years, with the bulk of that outperformance coming during the first twelve months.
For more evidence, take a look at the Guggenheim Spin-Off ETF (CSD). I have a decent amount of the cash that I would have put in say and S&P 500 index fund allocated to CSD. It has done quite well, substantially better than an equivalent major index. For a point of reference, Since I went long CSD in CAPS in June 2010 it has outperformed the S&P 500 +128.42% to +69.25%. That's nearly 60% worth of outperformance, or around 15% per year, which is substantial.
Something that I have been thinking about though...is this delta in performance alpha or beta? By this I mean we have essentially been in a major bull market ever since I started following and purchasing CSD. Is its excess returns just a magnification of the market's overall activity, or is it truly outperforming because it invests in better companies? I think that it's the latter, but we really won't know for certain until we see a longer bear market.
Anyhow, there's very compelling evidence that spinoffs outperform the market out there. The specific spinoff that I want to talk about in this post is a company that was recently spunoff of Dover Corporation (DOV), Knowles Corporation (KN).
In short, Kowles manufacturers all things related to speakers and microphones, from components of smartphones to hearing aids. A couple of things really stood out for me after going over the roadshow presentation for the spinoff a couple of months ago.
- First of all, as I mentioned Knowles is a spinoff which I love.
- Second Knowles has a solid track record of growth that I think should continue, though perhaps at a slightly slower pace, at what seemed to me a reasonable valuation.
- While the hearing aid sector is small it certainly has demographic tailwinds. Smartphones are a pretty good sector to be in as well.
- In its presentation Knowles management talked about how they were planning to cut costs by consolidating their manufacturing facilities.
New information that I was able to glean from a recent Barron's article that I like:
- KN trades at a discount to its peers on a forward earnings basis (I know that it's dangerous to look at forward earnings) at 12x when the others average 15x.
- The potential for additional microphones to be added to smartphones as they go higher end.
- The author of the Barron's piece believes that Knowles will have ample cash flow to initiate buybacks or possibly start paying a dividend in the near future.
When all is said and done I think that Knowles is a solid addition to the basket of spinoffs that I am building.
I'd love to hear others thoughts on KN or any other investments that they've found interesting lately, particularly those of the special situation variety.