I was getting ready to write about Lee Lowell’s put-selling strategy, but then this ad crossed my screen a bunch of times in a matter of moments … and I do love when we “learn” about secret share classes, disappearing stocks, and wacky ticker symbols, so I thought I should check it out for you.
The ad is for the S&A FDA Report by George Huang, a fairly expensive letter ($1,200 “on sale”) — and it’s all about what they’re calling “The ‘V’ Stock Phenomenon.”
Sounds cool, right? Well, I’ll tell you up front that there is something real here — let’s get into exactly what it is.
Here’s the first part of the pitch:
“Catch This ‘V’ Stock Before it Disappears in 10 Days… and See Up to 200% Gains”
“Every year, 2 or 3 stocks with a special V ticker appear on the market for less than 2 weeks… are removed… and produce double-to triple-digit returns.”
They then list a bunch of stocks that had “V” versions for a couple weeks, and that sported huge returns — among them IMA, EYE, VARI, AGN, EW, VSE, BSL, and CRA, and claim that since 1998 these s0-called “V” stocks “have produced an average gain of 692%.”
And a bit more hype for the mill:
“And let me be clear: ‘V’ stocks are not junk bonds… options…or any other super risky investment. Quite simply: They emerge on standard stock exchanges… and are just as easy to buy and sell as any other security.
“But the difference is: We’ve found that these extremely rare stocks have produced double and triple-digit gains every single time they’ve been made available to the public.
“(The last ‘V’ stock we spotted in July has since returned 114%. Ticker: FACT”V”)
“In fact, as you’re about to see –every single ‘V’ stock that we’ve come across over the last decade has made money.”
And then we get into the tease for their current “V” stock …
“In short: The newest ‘V’ stock has just appeared on the market…
“It emerged onto the New York Stock Exchange recently at about 9:30 a.m. – and is being offered by a small technology firm in California.
“Bear in mind: Only a few announcements about this stock were made available to the public. But this was NOT an IPO. In fact: About 90% of the investing world has no idea this stock even exists…
“But if you follow our instruction, this single event could create the biggest gain you see this year – a quick 50% over the next few months and a 200% return in the long run – even though this ‘V’ stock has already disappeared.”
And we get a bit more on the background about these “V” stocks, including some quotes from mainstream media sources to reinforce the fact that, well, they’re not just making it up …
“But as you’re about to see: The ‘V’ stock phenomenon we’ve descovered has nothing to do with that process… and is NOT an ‘initial public offering.’
“As a rare article on this topic in Kiplinger’s says: “In direct contrast to IPO’s, there are no investment bankers to profit from [these stocks]. Analysts… ignore [them].’
“Or consider BusinessWeek – who wrote one of the few studies we’ve seen about this phenomenon in the mainstream media: ‘Wall Street isn’t paid to tout these stocks, so they initially tend to fall through the cracks.’
“As a result, most people (like you and me) never hear about these stocks – for the simple reason that they appear almost completely unannounced with none of the fanfare that surrounds IPO’s… “
But this is a healthcare investing advisory service, right? So let’s get to some specifics … as you can imagine, we’re looking at a healthcare stock of some kind:
“Every year, around 40 ‘V’ stocks appear on the market… in every sector available…
“But it just so happens that in one particular sector – only 2 to 3 appear in a single year. And the track record, including all the stocks we’ve found over the past 11 years in this sector, is flawless: 23 for 23. Not a single loss among them.
That sector is healthcare.
“You see, in healthcare… there are a variety of different firms, from tiny biotech’s and startup medical suppliers to Blue Chip drug makers. And we’ve learned that in the past 11 years, every single healthcare ‘V’ stock we found has been a success.
“In fact, if you’d put $5,000 into each of these 23 healthcare ‘V’ stocks, you’d have potentially made over $795,750 in PURE PROFIT on these 23 stocks alone… ”
OK, so that’s how they narrow this down to those 23 “V” stocks that they say have been so spectacular … what’s the one they’re touting today? Yes, we will get there … patience!
“In short: Earlier this month, on Tuesday, September 1, a new ‘V’ stock appeared in the healthcare sector…
“A medical firm that makes hospital equipment issued it. They sell tens of dozens of healthcare products in 120 countries… from surgical instruments to respiratory machines… and are expected to make $4 billion next year.
“But the reality is, we couldn’t care less how much the firm will make. To you and me, there’s just one thing that truly matters about this situation…
“In a nutshell: It’s 1 of just 3 healthcare ‘V’ stocks to appear so far in 2009.
“And if the past decade is any indication… its shares could easily rise by at least 200% in the coming months, potentially even more.
“This ‘V’ stock just joined the S&P 500… which means the potential return could be enormous.”
“Of course, there’s no sure thing in the investment world, but if this stock follows the same pattern as the other healthcare ‘V’ stocks that have been offered, this could turn out to be the biggest gain we see all year. “
So there you have it — who is this company, and what the heck is a “V” stock?
The company is CareFusion (CFN)
And a “V” stock is a spin-off — actually, the company is a spin-off, what they’re referring to when they say “V” stock must be the “WI” stock that exists just before many spin-offs are officially separated from their parent companies.
Perhaps this requires a little bit of explanation:
Cardinal Health, a big healthcare equipment, supplies and distribution company, decided last year to spin off their division that develops high tech healthcare equipment for hospitals, largely equipment that monitors and controls drug delivery (like those little beeping IV machines that drive all patients crazy). After many months of preparation for this spinoff, they finally went through with it a few weeks ago.
The new company was called CareFusion, and it was given a ticker symbol of CFN. But there was a bit of a time lag — they refer to it as two weeks or ten days in the teaser, I’m not sure exactly how long it was in this case — when the shareholders of Cardinal Health were entitled to CFN shares, but the shares were not yet trading. Sort of like the lag time between when a stock goes “ex dividend” and when it actually pays the dividend.
During that time lag, you could still buy and sell your right to future CFN shares — and that right to those shares had a special ticker symbol. I’ve never seen a “V” used for this, but I usually see something like CFN-WI, with the WI standing for “when issued” … meaning you get CFN shares when they are created. And of course, that CFN-WI disappears after the brief interim period is over, because there’s no need for them anymore — you can just buy and sell CFN like any other ordinary stock, which is what it is today.
If you’d like to read about this particular spinoff and think about whether it’s a good investment for you, there was a good article and interview in Investors Business Daily about it last week.
So — is buying a spin-off always a good idea, as the ad implies? Well, to be honest, it often is. There have been several studies that indicate that spun-off companies do tend to outperform the market, particularly those that are smaller companies and that are spun-off directly to shareholders of the parent company (as opposed to sold into the market as a “carve out” IPO). There’s a lot of estimating and guessing about why this is so, but here’s the picture that many folks paint of the circumstances that enable this tendency to outperform:
The shareholders who get the spun-off shares often don’t really want them; or they don’t fit into the mutual funds or institutional strategies of folks who own the parent company, so the shares get sold off quickly as those unwilling holders sell. For this reason, most folks who study these spinoffs say it helps to wait for several months after the spinoff to buy the shares — the time frames that I’ve heard mentioned range from a few weeks to eight months.
After that, the theory is that these new companies are essentially orphans — they don’t have a broker pushing the shares behind the scenes or a lot of breathless media attention, because they aren’t hot IPOs and they’re often in rather boring industries; the new companies are usually much smaller than the parent, and they often don’t have any analyst coverage to drive investor attention and institutional money; and, in terms of fundamental performance, the spun-off companies often exceed expectations — that’s because once they’ve been separated from their parent they may become more efficient, more focused on their operations without the distractions of serving a larger firm’s goals, and more able to focus on growth and build their capital structure to feed that growth (or, alternatively, sometimes firms with stratospheric growth intentions spin off their slow-growth, recurring revenue kinds of businesses to fuel the parent’s growth, so sometimes the spin-off becomes a dividend payer or an asset-heavy company).
At least, that’s how many folks think the situation tends to work. That does not mean, of course, that ever spin-off outperforms the market, or that this strategy would necessarily work in all market conditions or for all companies. Sometimes these spin-offs are awful messes, saddled with debt from their parents and bereft of leadership, so I think you really have to take it case by case.
In this case, CareFusion does actually come complete with several analysts already, since Cardinal Health is a very large firm and CFN itself is pretty big (market cap somewhere in the neighborhood of $4 billion) and it went immediately into the S&P 500 (replacing Manitowoc) — there aren’t that many S&P 500 companies that can really fly under the radar. Of course, the part about CFN performing better as a separate and more focused company may well come to pass, we’ll have to wait and see — analysts already think Cardinal Health will do better without this subsidiary, a couple of them have upgraded the parent company since the spin-off. And it’s probably likely that the analysts will take some time to get a handle on the new firm and start providing good estimates, so there’s a good chance that the first few quarters will see some significant swings if the analyst guesstimates don’t hit the mark (in either direction, of course).
Since this spin-off trend has been noticed and studied by academics, lots of investors try to make money off of it — surprise! Some do so through various arbitrage strategies to try to target that small wedge of outperformance that the average spin-off is supposed to provide, but you can also do it through an exchange traded fund … yes, there is also a spin-off index ETF, called the Claymore/Beacon Spin-off ETF (CSD) that attempts to capture this tendency for spin-offs to outperform in the mid-cap and small-cap arena. It hasn’t done particularly well (it’s been around for about 2-1/2 years, over the past two years it has significantly lagged the performance of the S&P and the Russell 2000). the structure of the index tries to match this “wait a few months, then hold for a year or two” strategy, they rebalance and add new spin-offs, but when they do so they exclude any spin-off that happened within the last six months, and they remove any spun-off companies that have been separate for more than two years, so it looks like it’s a very tight 18-month window of ownership. The market over the past 2-1/2 years has obviously been “abnormal” in many ways, so perhaps these companies will have a hope of outperforming in the years ahead, I don’t know — I can only tell you that the ETF hasn’t “worked” yet.
And just to fill in the blanks for you, that BusinessWeek article that the teaser cites is here, it’s from 1999 so it’s quite focused on the tech spinoffs — remember Agilent? And the Kiplinger’s Personal Finance article on spin-offs that they quote is here, it’s also quite old.
So what do you think? Are you itching to pick up some shares of CareFusion, or would you rather wait a few months to see if it languishes and gets to a better price? Or do you think, as Goldman Sachs apparently does, that Cardinal Health is now a good buy? Any experiences you’d care to share with spin-off investing, or, really, wit and wisdom of any kind? Share it with a comment below.
And if you’ve had the good fortune or misfortune of subscribing to George Huang’s S&A FDA Report, let us know which it was with a review by clicking here. Thanks!
P.S. Just to be tricky, I can’t resist telling you that the stock with the actual Ticker V — Visa — is not a “V” stock as they tease the letter here … but one of their competitors is, Discover Financial. Discover, spun off from Morgan Stanley, is way down from the moment of its spin-off a little over two years ago … but if you had waited six months to buy it, you could have paid about $15 for the shares (instead of the $30 they were valued at when spun off). It’s been a wild ride for DFS, during it’s first two years you could have bought it for $30 or $5 or anywhere in between, but it’s now right back to $16 (and it is, coincidentally, the largest holding in the spin-off ETF that I mentioned above).