Profiting off the Immediate Dip in Stock Prices Following a Spinoffby Tom Murcko
Although spinoffs on average outperform the broad market for the first three years after the spinoff occurs, there is often an initial dip right after the spinoff. This is due to downward pressure from shareholders of the parent company who received shares of the spinoff but don't want them for whatever reason. The spinoff might not fit with a given investor's strategy, or a mutual fund's stated objectives. In addition, if the parent company is a member of an index such as the S&P 500, then index funds will have to sell the spinoff shares. This can present a buying opportunity for other savvy investors to take advantage of the temporary excess of supply over demand.