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Spinoff Companies Offer Head-Spinning Value

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It isn’t easy to find an edge in the stock market. But investing in spinoffs is one of the few areas where we can do that.

A spinoff happens when a parent company “spins off” a subsidiary or business unit into a standalone public company. When this happens, shareholders of the parent company receive shares of this newly spun-off entity.

Often, many of the institutional investors who receive these new shares don’t want them. They invested in the much larger parent company, not the smaller subsidiary.

Other times, the institutional investors aren’t even allowed to own shares of the smaller company. This is because their investment guidelines sometimes don’t allow them to own companies under a certain size or with less liquidity.

Regardless of their reasoning, what happens next is that the institutions sell. And they sell quickly.

This is our opportunity.

Anytime a widespread sell-off happens due to something other than underlying business performance, there is a very real chance that a stock can become undervalued.

Long-term studies back up the outperformance of investing in spinoffs.

Purdue University looked at 311 different spinoffs over a 36-year period between 1965 and 2000.

The results were amazing.

In the first 12 months following the spinoffs, the new businesses outperformed their benchmark companies by a whopping 20%.

That isn’t modest outperformance… That is outperformance by a huge margin.

Another study at Penn State University found similar results.

Penn State found that spinoff companies outperformed both their peers and the overall market by 10% annually in their first three years.

Wow, wow, wow!

A recent spinoff that I think is set up for outperformance is Corebridge Financial (NYSE: CRBG).

Corebridge is a life insurance and retirement services company that was recently spun off from American International Group (NYSE: AIG).

Corebridge Financial has four major operating segments:

  • Individual retirement, representing 53% of earnings
  • Group retirement, representing 25% of earnings
  • Institutional markets, representing 11% of earnings
  • Life insurance, representing 10% of earnings.

As you can imagine, selling retirement products and life insurance isn’t an exciting business.

But it is a good business, and it is very, very cheap.

The consensus analyst view for 2023 is for Corebridge to earn $3.72 per share.

With Corebridge’s current trading price of about $20, that puts its price-to-earnings ratio at a measly 5.3.

This valuation is very low, even by the insurance industry standards.

Corebridge’s peers trade closer to eight times earnings, which is 50% higher than where the stock trades today.

On top of this cheap valuation, Corebridge also pays a juicy dividend, which is currently set at $0.23 per quarter. That equates to a stout 4.6% yield at the current stock price.

To me, that makes this a spinoff worth owning today.

The Value Meter rates this steady Corebridge business as “Slightly Undervalued.”
The Value Meter

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