There’s a lot of evidence suggesting that spinoff stocks are generally a good idea to watch. Following a split from their parent company, many such firms do well thanks to their efficiency and newly-found flexibility.
They also tend to be undervalued at first which presents an attractive entry point for value investors. That’s why many notable value investors such as Charlie Munger remain adamant that investors find spinoff stocks to watch.
The reasons a publicly traded company pursues a spinoff are varied. Some firms do so to isolate their strengths while others do so to divest their company of a strategically misaligned unit. Some are successful while others are not. Let’s take a look at three spinoff stocks to watch and discuss whether they will or will not be successful.
KenVue (KVUE)
KenVue (NYSE:KVUE) Is an interesting spinoff stock from Johnson & Johnson (NYSE:JNJ) that became publicly traded in May of 2023. The spinoff was enacted so that the parent company could focus on faster growing pharmaceutical and medical device verticals.
Investors in KenVue benefit from access to the revenues and profits from its well known consumer brands including Tylenol and J&J baby powder. Settlement payouts associated with the latter are the responsibility of Johnson & Johnson and not KenVue.
KenVue is an interesting proposition because the company trades below IPO prices. At IPO the firm was valued at $50 billion dollars. It is currently valued at approximately $36 billion. Stunted share prices have resulted in higher yields in its dividend. Those yields currently sit at 4.2%. I like the company for its relatively high yield dividend at the moment. I don’t anticipate that it should reach IPO prices again anytime soon. Growth is relatively flat and nothing about the company’s current financials suggest it should increase in value by nearly 50% anytime soon. In short, it’s a good dividend and income stock at current prices but investors who got in at the IPO in May of 2023 have no reason to be happy.
Solventum (SOLV)
Solventum (NYSE:SOLV) is the recently spun off stock comprising the former healthcare arm of 3M (NYSE:MMM).
In that regard, Solventum is very similar to KenVue. Both firms represent health care carve outs from legacy companies facing substantial litigation. Both firms have also faced cool receptions following their initial public offerings.
That’s the point that I want to focus on as it relates to Solventum. While KenVue has a saving grace in its relatively high yield dividend, Solventum does not. Investors then are left looking at Solventum for its raw ability to provide growth. Unfortunately, there is no such expectation of growth between this year and next.
Some sources continue to offer the notion that Solventum represents a value play due to its relative discount. Yes, it trades at a discount relative to sales when compared with the S&P 500 overall. However, investors can broadly expect the S&P 500 to grow their investment by 10% annually. There’s no logical reason to expect Solventum to do the same for their capital. I think this one’s bound to fizzle.
GE Healthcare (GEHC)
GE Healthcare (NASDAQ:GEHC) stock should continue to thrive following its spinoff at the beginning of 2023. The shares already have a relatively long track record and represent what can happen positively when a company enacts a spinoff of a segment.
So, let’s quickly talk about the company, what it does, and why investors should continue to be positive about the stock moving forward. GE Healthcare is focused on complex diagnostics and monitoring equipment.
That’s a particularly interesting niche to be in, especially in consideration of artificial intelligence. It’s clear that GE Healthcare’s management is laser focused on that opportunity. The company hired a former Amazon (NASDAQ:AMZN) executive in charge of machine learning in order to align R&D more appropriately for the future. The company clearly sees huge potential in the combination of diagnostics and AI.
The parent company continues to spinoff major segments today. Aerospace will now be the primary focus of the parent company. Time will tell whether that’s successful or not but the GE Healthcare spinoff is a solid investment.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
