“SIPO’s: Stocks in This Obscure, Govt.-Regulated Niche Have Returned an Average Gain of 213%”

Uncovering the inaugural teaser picks from Shah Gilani's Spin Trader

By Travis Johnson, Stock Gumshoe, October 20, 2011

This teaser ad from the Money Map folks for Shah Gilani’s Spin Trader has gotten a lot of attention from my readers …

… and as with most of the drool-inducing ads for investment newsletters, it promises massive returns and makes them sound even sexier by inventing a new term to refer to this mysterious wealth-making strategy: SIPOs.

Here’s a taste of the ad to get your wallet tingling:

“For 15 Years and Counting… Stocks in This Obscure, Govt.-Regulated Niche Have Returned an Average Gain of 213% in Our Study…

“Federal Law forces most institutions out of these stocks –
and that makes them act in a predictable way…

“This niche I call ‘SIPOs’ is so tiny that I’m surprised most investors… most pundits… most commentators… even most die-hard Wall Street cronies don’t pay enough attention to it.

“But this is very real. And having analyzed years of historical data, its track record is quite impressive.

“In fact, Bloomberg reports that SIPOs have more than tripled the return of the S&P for the past nine years. They’re up 170% as a group.”

As we go a bit further along, it becomes clear (and they eventually admit as much) that “SIPOs” are spin-offs — get it, “Spin-off IPOs“?

Spin-offs are companies that are split from a parent corporation, usually because they represent a division of a larger corporation that doesn’t provide any strategic synergy or because the bulk of the parent is obscuring the growth or potential of a division. There are lots of reasons given for spinning off or carving out a new company, but the basic one is, as you might imagine, that management thinks the parts will be worth more separately than they are together.

And this is largely true on average — spin-offs have outperformed the overall market most of the time over much of the past 25 years or so, according to dozens of academic and professional analyst studies. Though that 170% number teased is extreme compared to most studies (I didn’t look up the Bloomberg report that they cited, nor do I know what specifics they included) … generally, when you see longer-term studies of spin-off performance the indication is that they tend to outperform the market by perhaps 2-5% per year, with the smaller spun-out company generally doing better than the parent but often both of them outperforming the market.

Most of those studies are more than a decade old, but the general idea is pretty well accepted in the marketplace: parent companies tend to get a short-term pop in share price upon announcement of a spinoff, and spun-off shares tend to dip in the months immediately after being separated by their parent, but to substantially outperform the market in the year or two after that initial period.

The most aggressive analysis of this that I’ve seen is from Credit Suisse, you can find a copy of their report (from 2008) here, and they found that the spun-off company outperformed the S&P by 22% in the first year … though that uses a sample of 39 spin-offs from 2001 to 2006 and, to their credit, they note that “The median returns mask what is far from a consistent pattern.”

Which means, yes, the average is good (or has been good), but the distribution of returns is very abnormal — so we should take the “on average this is great” overall statement with a big grain of salt when it comes to individual companies and stocks. There are also more aggressive reports that I’ve heard cited, claims of up to 40-50% annual outperformance, but I haven’t read them and I imagine they must refer to shorter time periods or more aggressive ways of calculating returns.

And, in truth, we should note that aside from the fact that it doesn’t always work for every stock, which we should intuitively know, it also doesn’t work in every market or every year. This is a very, very small subset of the market where the actual character of one or two relatively big spin-offs could significantly change the returns in a given time per