Profiting From Special Situations

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December 11, 2006 | Stocks | | Author Asif

A subscriber recently asked me if I was aware of any websites that have an email notification system or an RSS feed for special events like stock splits, spinoffs and special dividends. Academic research has shown that companies declaring stock splits and special dividends tend to do well for a period of time after the announcement of these events. The stock split theory discussed in the academic paper “Underreaction to Self-Selected News Events: The Case of Stock Splits” by professors David Ikenberry and Sundaresh Ramnath formed the basis for selecting Logitech (LOGI) and Infosys (INFY) in the June 2006 edition of SINLetter.

Logitech is up more than 44% and Infosys is up an impressive 54% since June. Another recent example is the asset management company U.S. Global Investors (GROW) that has almost doubled since it announced a stock split on November 8, 2006. Yes, a gain of over 92% in little over a month. I am still kicking myself for not taking a closer look at U.S. Global, especially since I had a drink with one of its directors less than two months ago.

Spinoffs are also interesting events, as more often than not, companies that are spun off as independent entities tend to do better than their corporate parents. An example of a spinoff that has done exceedingly well is Chipotle Mexican Grill (CMG), which was spun off from McDonald’s (MCD) through an IPO earlier this year. Chipotle went public at $22 a share and is now up more than 145% at $54.85. In this particular instance, the parent company also proved to be a good investment. For analysis of a recent spinoff, check out this article by George of Fat Pitch Financials about Sally Beauty Holdings (SBH).

Given that these special situations could help one outperform the indices, I can see why a service that notifies investors about special events could be very beneficial. Here is a list of websites that I am aware of and if you are familiar with other resources please feel free to share them by leaving a comment.

  1. Stock split calendar on Briefing.com
  2. Stock split notification from Stocksplit.net (email)
  3. Spinoff newsletter ($)
  4. Spin-Off Advisors ($$$$$ – Annual subscriptions are $20,000. Yikes!)
  5. IPO calendar on Briefing.com
  6. IPO analysis on SeekingAlpha (email and RSS)
  7. Tradingipos.com Blog (RSS)
  8. IPO Buzz on IPOScoop.com (RSS)
  9. Academic Study on Special Dividends (PDF)
  10. Academic Study on Stock Splits ($)
  11. Fat Pitch Financials Contributor’s Corner ($)
  12. List of Stock Buybacks on TheOnlineInvestor.com
  13. Stock Buyback News on MSN Money

Clearly not every company that splits its stock, declares a special dividend or is a spinoff of a larger company is going to do well. However these special events do provide fertile hunting grounds for investors.




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Comments

  1. Bob
    December 12th, 2006

    Hi Asif, I have been following your blog for a few months and find it very insightful.Regarding this post about “Profiting from Special situations” should one be looking to buy when the stock split is announced or when the actual split happens.

  2. Asif
    December 12th, 2006

    Thanks Bob. The answer to your question lies in the discussion of Logitech in the June 2006 edition of SINLetter but I am going to repost some of it here.

    According to the academic study "Underreaction to Self-Selected News Events: The Case of Stock Splits", which looked at stocks that declared splits between 1988 and 1997, the mean return of stocks in this group was 9% higher in the first year after the split and the median return was 6.37% higher when compared to a control group.

    An earlier paper called "What Do Stock Splits Really Signal?" by professors David Ikenberry, Graeme Rankine and Earl K. Stice looked at the returns of 1,275 companies that declared stock splits between 1975 and 1990 and found that in the first year after the effective date of the split, these stocks outperformed a benchmark group of companies by 8%. Over a period of three years, the results were even more impressive with these stocks outperforming the benchmark group by 16%.

    So it looks like there may be plenty of time to get into companies declaring stock splits. In my opinion, the best time may be right after the announcement. It also depends on general market conditions, the nature of the industry and if the announcement causes a large spike in the stock price.  

    Many investors consider stock splits as insignificant events. If that perception changes and this stock split theory become as popular as the Dogs of the Dow, the returns discussed in these academic papers may actually diminish.   

  3. George
    December 12th, 2006

    You might want to consider adding Fat Pitch Financials Contributor’s Corner ($) to your list of services.  It covers spin-offs, odd lot tender offers, going private transactions, and other special situations.  Email notification of new events can be activated by members.

  4. Asif
    December 12th, 2006

    Thanks George. I have included the link to your Contributor’s Corner.

  5. AF
    December 14th, 2006

    Ah, 

    But the geek question to ask is:

    Do they outperform at 9% because of the split, or is it that they split because they are a good company, and expected to outperform?

    Take BRKA  which has never split but has outperformed the dow over the last tw as the ‘control’ and what would happen?

    http://finance.yahoo.com/q/bc?s=BRK-A&t=2y&l=on&z=m&q=l&c=%5EDJI

  6. Asif
    December 14th, 2006

    That is an interesting question AF. A split in itself is a financial non-event as it changes nothing and so there are other factors at play here. One of these factors was mentioned in the June 2006 edition of SINLetter and I am reposting it here,

    "The reason for these higher returns? After ruling out factors such as increased coverage by analysts, Ikenberry and Ramnath concluded that 85% of companies that declare stock splits tend to have higher earnings growth in the ensuing years and analysts that follow these companies are slow to revise their earnings expectations upwards."

    A pure stock split strategy may not always work, especially during a raging bull market when many companies split their stock simply because a rising tide lifts all boats.

    Using Berkshire Hathaway (BRK-A) as a control group is an excellent idea. I think that it depends entirely on the company that declares a stock split and the period of time you are looking at. For example, while BRK has outperformed the Dow over the last two years, check out this chart comparing the performance of the Dow, Berkshire Hathaway and Logitech.

  7. Kal
    June 29th, 2007

    What about reverse splits

  8. Asif
    June 29th, 2007

    Kal, reverse splits generally tend to have the reverse effect and stocks that do reverse splits often tend to decline after the split is announced or completed. There are exceptions to this and Priceline (PCLN) was a notable example of a company that did a reverse split and the stock went on to achieve new highs.

    I am not sure if there are any academic studies done on the effect of reverse splits but if I find anything, I will post it on this thread.

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