Special Situation Investing

Monday, February 05, 2007

Spinoff Tracker Index

Clear indexes has built an index of a variety of spinoff companies, here. I am not sure that you can actually invest in the index but for those looking for a list of spinoffs this would be a good starting point. Unfortunately, the spinoffs don't show up on the list until after they are spun out and even then, the index is only updated semi-annually.

A description of the indexes methodology is as follows:

  1. Potential Index constituents include all equities trading on major U.S. exchanges of companies that have been spun-off within the past two years.

  2. The Spin-Off Index comprises the 40 highest-ranking stocks chosen from the universe of spun-off companies.

  3. Each company is ranked using a 100% quantitative rules-based methodology that includes composite scoring of several growth-oriented, multi-factor filters, and is sorted from highest to lowest.

  4. The 40 highest-ranking stocks are chosen and given a modified market cap weighting with a maximum weight of 5%.

  5. The constituent selection process and portfolio rebalance is repeated semi-annually.

I have a couple of problems with the index beyond it's use as a reference. In general, I have a hard time believing that any semi-automated system can do well over time. Also, having an analytical background, I am very skeptical of past performance studies, in this indexes case the performance is tracked back 5 years. Anything less than 20 or 30 years is meaningless in my opinion, and even then, who's to say the next 20 to 30 years will be the same as the past. If you do insist on automatic selection then you better have a broad sweep of companies (500+) to provide for diversity. Also, with the vast growth in hedge funds any well-documented and successful strategy, e.g. picking spunoff companies, tends to get exploited and the gains reduced. Not to say that spinoffs aren't attractive, in some cases they certainly are, just that they are not what they once were. That is why I don't actually buy the majority of spinoffs I see, I still try to apply qualitative and quantitative analysis, and pick the most promising ones.

Anyways, that's just my opinionated ramblings and maybe it's just my ego talking. Like I said, the list is certainly worth monitoring if you're interested in special situations.


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