»5 Minute Wrap Up by Equitymaster

On This Day - 24 OCTOBER 2018
My Latest Recommendation with 63% Upside

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

This month's Smart Money Secrets recommendation is unique in many ways.

Normally, we recommend a company in which super investors have a small stake. It could be 1%-5%, or up to a maximum of 6%-8%.

But this month's recommendation is different. Here, the super investor owns the company.

But that was just the first trigger.

Here is the main reason for recommending the stock...

Earlier this year, it announced a spin-off of one of its divisions. This got us interested. We analysed the company in detail.

Creating Value with Spin-offs

What is spin-off?

Investopedia defines a spin-off as:

  • A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.

Now, spin-offs often provide Fertile ground for big investment opportunities. Spin-offs can make a company very attractive in the market. Allow me to explain...

You see, it is based on the logic that the sum of the parts is greater than the whole. Spin-offs often result in a higher aggregate value for the constituent pieces.

Another interesting fact... very few investors venture into this kind of opportunity. The transactions could be complex. There isn't a lot of information available.

Here's what famous investor Joel Greenblatt had to say about spin-offs:

  • There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is only one reason to pay any attention when they do: you can make a pile of money investing in spin-offs. The facts are overwhelming. Stocks of spinoff companies, and even the shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages.

Now, with this spin-off, the company will benefit due to the sharp focus on its core business.

Also, it will help to reduce the complex corporate structure. There will now be separate lines of business with different costs and revenues.

And here's another interesting thing.

Even if we ignored the fact that a super investor owns it and the possible opportunity due to the spin-off, we would still consider recommending this company due to its business quality.

Ultimately, every company has to pass through our Smart Money Score.

And guess what, this one passed the test with flying colours.

With the recent market correction, the stock available at attractive valuations.

That means the margin of safety is also in place.

We are excited about this stock. The potential upside is 63%.

If you're a Smart Money Secrets subscriber, would have received the recommendation report in your inbox on Monday.

If you don't have a subscription to Smart Money Secrets, sign up here.

Chart of the Day

Talking of spin-offs, did you know in the US, there is a spin-off index?

Yes, really! It's designed to measure the performance of companies within the S&P universe. It is called as the S&P US spin-off index.

This index considers companies which have been spun off from a parent company within the last four years and have a minimum float-adjusted market cap of US$ 1 billion.

Historically, spin-offs have outperformed the broad market as they potentially unlock value. This is because the market has valued the sum-of-the-parts more favourably than the conglomerate, which includes those parts as one entity.

Spin-Offs Outperforms the Market in the Last 10 Years

In the last ten years, the S&P Spin-off index has given annualised returns of 20.5% compared to 13.8% returns given by the S&P 500.

Similarly, the spin-off index outperformed the broader index in eight years out of the last ten years.

This month's Smart Money Score recommendation is set to benefit from this. The spin-off process will bring sharp focus on its core business.

I believe, the potential upside in this stock is 63%.

If you're a Smart Money Secrets subscriber, you can read the detailed report here.

If not, you can get the report by signing up here.


Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: You can now track the moves of 40+ super investors of India and receive cherry-picked recommendations of the most lucrative stocks bought by these market gurus. Smart Money Secrets is a premium stock recommendation service based on following the smart money, the market activities of the very best investors in India. Get access to this exclusive stock recommendation service here.

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