The merry lads at the Oxford Club are at it again, promoting their subscription service with a nice long teaser ad that promises to turn you on to the next hot investing strategy.
And as usual, there’s a little truth and a lot of obfuscation — so let’s give it a look.
Here’s how they open:
“The $120 Billion “Secret Market” That’s Sizzling Hot
“How a little known “Orphan Stock’ strategy routinely hands investors 592% to 2,095% gains. And how one small group of investors could be poised to double their money in a day…”
Sounds pretty tasty, eh? It gets better …
“According to a recent study by Wall Street analysts; investors using this strategy outperformed the S&P 500 an average of 45% over a two-year period …”
Wow — that could have almost kept you into positive territory! Assuming, of course, that the two year period was the last two years.
They describe this as an “Orphan Stock” strategy, and, to their credit, they do go so far as specifying that they’re talking about spinoffs.
Spinoffs are when a division of a company is, as you might imagine, “spun off” as a separate publicly traded company — either because the parent firm thinks that the then “orphaned” division would do better with it’s own management and priorities, or because there’s a belief that this division is undervalued and won’t recognize it’s real value in the market until it’s separately traded.
There are all kinds of spinoffs — sometimes a company will just issue a “tracking stock” without actually selling the division, and report that division’s numbers separately and have them represented by the semi-artificial tracking stock. This is what Loews did with Carolina Group (their tobacco business) for a few years before they decided to completely separate from them and Carolina Group was fully spun off as Lorillard.
Other times, a company will spin off a small portion of a business — maybe 10 or 20%, without wanting to lose control, but in an attempt to get a better valuation for that division and have that better valuation also reflected on the parent company that continues to hold a majority of the shares. This is how it has been so far for VMWare in its separation from EMC, for example, though it’s possible that they’re planning on spinning off or selling the rest of those shares, too.
And finally, a company can spin off divisions in more than one way — two strategies are most common, they can sell the division to the public in an IPO, launching all or part of the division as a separate company; or they can simply spin off the shares to current shareholders so that they can find their own private market. Often both are used, a portion of the shares could be spun off to current shareholders and some time could be allowed for a market in those shares to be set, then the company could sell the rest of the shares in the public markets.
There are more quotes to help make this sound awesome …
“‘I don’t say this often,’ says Lou Basenese, top analyst for a leading financial organization, ‘but this is the kind of situation that could be like a cash cow for you over the coming years. Draw from it when you need it and it could still fund a very nice retirement for you, maybe even your children.’”
Of course, they don’t mention in that paragraph that the “leading financial organization” Basenese works for is the same one that’s sending you this ad.
There are all kinds of tax questions involved with different kinds of spinoffs, but we’re not worried about that now — what we want to know is, what is the one great spinoff that the Oxford Club thinks could make us rich?
We get some clues, naturally, to feed the Gumshoe’s mighty Thinkolator:
“Right now, our team of experts has just pinpointed a ‘Global Titan’ – a powerhouse company that’s poised for growth in overseas markets – that’s in talks to sever ties of one division that’s driving its huge success.
“What makes this “Global Titan’s” new “Orphan Stock” even more appealing is that it’s in a recession-proof industry that will be minimally impacted by the worldwide economic slump. In fact, sales are likely to rise as consumers tighten their wallets and seek out cheaper alternatives in this nearly $600 billion industry.
“Why are they severing ties? Because they know that the China division of this company has the very real potential to be bigger than the parent company itself. And they all want a piece of the action …
“Insiders are calling it ‘The Spin-Off of the Decade’”
Hmm … so that gives us some sense of the firm we’re looking for. How about some specific clues, please, Mr. Oxford Club?
This company was a spinoff itself “a little over 10 years ago.”
“Since then, the company has expanded its number of worldwide locations by over 20%… opened up in 15 new countries, become the worldwide leader in its sector, and seen its China operations grow to more than 160,000 employees and one billion customers.
“It’s one of the fastest growing retailers in the world… opening three new locations worldwide every day of 2007 ….
“… currently operates 3,100 China locations. Management estimates China can conservatively support 20,000 locations (roughly the same amount of stores in the U.S.). Divide the deficit of 16,900 locations by a growth rate of 375 new China locations per year, and you get over 45 years of growth.”
and we get some more quotes from Lou Basenese, who is apparently also the Oxford Club’s specialist in takeovers and spin-offs …
“‘China is the single greatest investment opportunity of our lifetime,’ says Lou. ‘And in my opinion – and based on my research – this stocks spin-off is the ultimate China play. It’s like investing in GE when the company first started.’
“’While most companies are just embracing China,’ Lou continues, ‘this company started its operations there over 20 years ago….
“‘Spin-offs let the markets more accurately value the operations. So it’s important to know the parent companies’ motivation,’ Lou continues. ‘Are they divesting underperforming assets to revive the parent stock, or breaking out quickly growing operations being held back? In my experience, if you stick to spin-offs of the latter, you’ll be handsomely rewarded.’”
So what is it? What is this “Global Titan” that will soon be spinning off an “Orphan Stock” in the form of it’s Chinese operations, and will send buckets of cash raining down upon your head?
The Thinkolator needs only a few moments to churn through this one, and I can tell you that the company being teased here is …
Yum Brands (YUM)
Yum was indeed spun off — from parent PepsiCo — about 11 years ago. They were initially called Tricon Restaurants, (I assume the Tri referred to their primary brands KFC, Pizza Hut, and Taco Bell,) and a few years later they changed their name to Yum Brands, though the focus is overwhelmingly still on those three restaurant brands (they also own a couple other smaller ones — A&W and Long John Silver).
And Yum is indeed everyone’s favorite “safe” China story — an American company that did an amazingly good job of slowly building a brand overseas, KFC and Pizza Hut are both very popular in China, with localized menus and great grand awareness and a big and growing footprint of stores (the numbers of 160,000 employees and 3,100 stores in China are roughly accurate, though they continue to grow quickly so they’re probably a bit out of date already).
Are spinoffs always a good investment? Of course not — and sometimes they lose their allure very quickly, as you could see from the recent history of a few spinoffs that are cited as huge winners in the ad — Chipotle and VMWare. Both did have massive stock runs in the months following their spinoffs from Mom and Dad (McDonald’s and EMC, respectively), but have since fallen dramatically. In Chipotle’s case the shares are getting close to the initial price that they traded at following the first spinoff of shares more than two years ago, and VMWare has fallen well below its IPO price, let alone the hugely run up price it attained later on the the day the shares were spun. That’s not necessarily any indictment of spinoffs, you could have definitely traded these for great gains if you sold at the right time, and the more recent collapse has a lot more to do with the market in general and with the economy than it does with the fact that these companies were spun off from larger parents.
The academic research on this has been done over the past decade or so, and it does support the general notion that spinoffs are good for the spun off shares — which also makes sense, there will clearly be some occasions when the spinoff is just mean to clear the parent company’s books, and the child is loaded with debt or with bad assets, but in most high profile cases divisions are spun off in order to raise the profile of a hidden gem within a larger corporation.
Is YUM going to spin off its China division? I have no idea — as far as I can tell, if they’ve had “talks” about this, the talks have been private, I haven’t seem it mentioned on any recent conference calls or in any analyst notes or articles. There is a logic to it — the China division is already separate within the company, and it is the real growth driver of the whole corporation. It would make sense to me to see them spun off in part, but if this happens I would assume it would be a case where a small portion was spun off but the parent retained a controlling stake into the foreseeable future — it seems foolish to rid yourself of your one really promising business unless you have to, and Yum doesn’t appear to need to. They don’t carry a lot of debt, and their other businesses appear to be fine, albeit not nearly as profitable as the Chinese ones.
And if they do spin off Yum China, will the combined stocks be worth more than the whole? Again, we can’t know until (if) it happens, but that would make some sense — Yum would still have a big international business that’s growing relatively well if you don’t compare it to China, including a growing presence and acceptance in India as well as a solid maturing presence in Europe that could still grow a lot if it were to catch up with the penetration of market leader McDonald’s. And the US business would still be appealing for investors to some degree, even though their last quarter wasn’t hugely successful as they revamp some menu and marketing offerings for the weaker economy — there is a tendency for fast food stocks to do relatively well in poor economies, as you’ll see from all the folks still touting McDonald’s.
Of course, any spinoff or IPO of Yum China would probably have a much bigger impact in a better market, and I don’t know of any reason why Yum should feel compelled to make that decision now. It’s a good company, the shares have just about tracked even with the S&P 500 over the last quarter or so, but over long periods they have significantly outperformed. It carries a halfway decent dividend of 3%, and the trailing PE ratio is about 14 (forward PE ratio is around 13, which tells you that analysts are being quite conservative with growth expectations — don’t know if it’s conservative enough, but at least they’re not betting on huge growth next year).
So do you like Yum? It’s been a favorite of Robert Hsu’s for his China investment newsletter for quite some time, and others from the Motley Fool to Jim Cramer have lauded the shares at one time or another as a safe and solid China bet — is now a good time to buy?