Stocks spun out of large corporate parent companies have emerged as consistent winners this year. About 15 companies have completed spinoffs through 2024, the most notable being the GE Aviation and Energy spinoffs. GE Vernova shares have risen more than 23% since they began trading in late March. The S&P 500 rose nearly 9% in 2024, but fell just over 1% in the second quarter. Additional opportunities for investors to participate in spin-offs may soon become available. Morgan Stanley said 19 more companies plan to complete spin-offs this year. “Spinoffs provide investors with a unique opportunity to take advantage of unrealized and potentially undervalued value,” Morgan Stanley strategist Todd Castaño wrote in a note this week. The Wall Street bank previously found that two years after a spinoff, the spinoff company outperformed the market by more than 2%, while the parent company underperformed the market by 8.1%. To be sure, not all derivatives are automatic winners. If a company spins off companies in different industries, the new stock will tend to outperform the market because it is likely to be undervalued. Conversely, spin-offs in the same industry may indicate that the parent company is trying to sell underperforming assets. A cheap valuation may not represent a good deal either. Wolfe Research previously found that spinoffs with higher valuations trended better, meaning higher valuations may be indicative of a stock’s quality. Winner and upcoming beneficiary Roth MKM also recently highlighted the spin-off stock’s outperformance over the past year. GE Vernova is one of my favorite derivative stocks right now — the company calls it a “buy, buy, buy.” Roth MKM said Swedish-American industrial company Esab, which makes welding and cutting equipment, was another spin-off beneficiary. Esab completed its spin-off from Enovis in April 2022. Shares are up nearly 28% so far this year. Ross MKM said paper maker Sylvamo is another stock investors should “join this momentum”. Sylvamo, which is headquartered in Memphis but has a large presence in Latin America, saw its shares surge more than 34% in 2024. Trading for Danaher began in October following the spin-off. JC O’Hara, chief market technician at Roth MKM, said the stock showed a “strong young chart.” Shares are up nearly 18% so far this year. Investors can also look for opportunities in some of the upcoming spinoffs this year. Several healthcare companies will spin off operations in the second half of 2024, according to a list compiled by Morgan Stanley. Baxter has underperformed the market this year, with shares down 7% year to date and 16% since March 31. Edwards Lifesciences also plans to spin off its critical care unit. Although Edwards shares are down more than 10% so far in the second quarter, the stock is still up more than 12% this year. Dove and Ax soap maker Unilever plans to spin off its ice cream business in the fourth quarter. Unilever’s U.S.-listed shares are up 8.5% this year, roughly in line with the S&P 500’s gains. —CNBC’s Michael Bloom contributed to this report.
