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Stock spinoffs are a popular corporate strategy for unlocking shareholder value, but one that rarely pays off for investors.
Harvard Business Review found half of all spinoffs failed to create any new value for investors in the two years following the separation. Worse, 25% destroyed as much as 50% of their combined market cap. That view backs up what other studies found.
Consulting group The Edge found 56% destroyed shareholder value after one month, 47% had negative returns after three months, and 38% failed to generate any new value after a year.
This is hardly a ringing endorsement for spinoff stock investing. Yet HBR also found the top 25% generated a 75% increase in combined market cap after two years while The Edge said 44% of spinoffs gained more than 20% in value after one year.
It shows investors need to use care in buying spinoff stocks. The two stocks below seem to run true to form. Shares are down 16% on average, but let's see if they can break the mold and run higher.
Key Points About This Article:
- Stock spinoffs are a popular corporate strategy to unlock shareholder value, but studies show they rarely do, with half or more destroying value over the first two years.
- Yet when spinoffs work they can create tremendous value and the two stocks below are down since their separation. Read on to see if they can turn around their bad fortune.
- Still, if you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.
Grail (GRAL)
Lab technician testing vials
Cancer testing outfit Grail (NASDAQ:GRAL) was spun off in late June after a brief but tortuous marriage to Illumina ( NASDAQ:ILMN ).
The genetic testing company created Grail in 2016 before spinning it off as an independent company. Four years later, Illumina bought Grail again over the objections of Federal Trade Commission regulators who sued the company to force a divestiture.
Illumina won on appeal, but it also attracted activist investors including billionaire Carl Icahn, who also sued the board of directors for violating their fiduciary responsibilities in making the acquisition. The genetic testing stock finally relented and spun off Grail on June 25.
The stock opened at $18.35 per share, but closed on its first day of trading at $17 per share. Shares have been volatile since, and in mid-July nearly reached $20 per share. Recently, though, GRAL stock closed at $14.53, a 21% decline from its debut.
Yet Grail has significant potential. According to the company, doctors can only test for five specific cancers . However, cancers causing over 70% of all cancer deaths have no recommended early detection screening. Grail’s Galleri blood test can detect 50 different cancers before they become symptomatic, including 80% of those that are not currently screened for but cause death.
This seems like a no-brainer to eventually succeed, but organizations like the American Cancer Association want proof Galleri prevents death. However, that's not the purpose of what Grail's studies are designed to prove.
The market has essentially written off Grail's stock as it trades at a tiny fraction of its book value and the cash it has on hand. For the speculative portion of your portfolio, GRAL could be a smart buy.
Solventum (SOLV)
Doctors performing surgery
Solventum (NYSE:SOLV) was the healthcare business industrial conglomerate 3M ( NYSE:MMM ) spun off this past April. Like Grail, it is off to an inauspicious start. The stock is down 25% from where it began trading on a when-issued basis, though just 13% lower from the $69 price when 3M completed the separation on April 1.
It is a rather unique situation considering the value destruction 3M has caused over the past few years. Between 2018 and 2023, the conglomerate's stock lost almost two-thirds of its value. Yet it is in turnaround mode and since last October, MMM shares are up an incredible 83% as it began settling the many lawsuits against it. From the time of the Solventum spinoff, 3M is up 40%.
Solventum is one of the largest providers of sterilization devices, dressings, tapes, and other consumables used by medical care facilities. It generated some $8.2 billion for 3M in 2023 but the company has issues.
Chief among them is 3M loaded it with debt , or $8.3 billion. Management says it is focused is paying down that figure over the next 24 months. It has just $897 million in cash and equivalents, plus operating profits have been stagnant for several years. They slid 20% in the second quarter, but Solventum's saving grace is it has robust operating margins north of 20%.
In comparison, GE Healthcare Technologies ( NASDAQ:GEHC ) has operating margins of 12.5%. Its stock is also down 6% since April, though it has been trading since January, 2023 following its own spinoff. Shares are up 50% since then.
Wall Street has a fairly negative outlook for Solventum, assigning a sell rating to the stock and a $58 per share one-year price target. Investors might be better off avoiding SOLV shares for now.
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