{"id":43288,"date":"2013-10-23T05:49:49","date_gmt":"2013-10-23T09:49:49","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=43288"},"modified":"2013-10-23T05:49:49","modified_gmt":"2013-10-23T09:49:49","slug":"a-cant-lose-way-to-profit-from-the-next-corporate-spinoff","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/10\/23\/a-cant-lose-way-to-profit-from-the-next-corporate-spinoff\/","title":{"rendered":"A Can\u2019t Lose Way to Profit From the Next Corporate Spinoff"},"content":{"rendered":"

By WallStreetDaily.com<\/u><\/a> <\/p>\n

After a dearth of activity in the early stages of the bull market, corporations now appear dead set on unlocking hidden value via spinoffs.<\/p>\n

Case in point: Two dozen deals have already been completed this year. And at least another<\/i> two dozen are officially in the works, including American Express & Co.\u2019s<\/b> (AXP<\/a>) spinoff of its business travel division.<\/p>\n

Ever the impatient lot, analysts and investors aren\u2019t waiting for new spinoffs to be announced, though.<\/p>\n

Instead, they\u2019re out trying to predict the next corporate breakup in advance – much like they try to predict the next takeover target<\/a>.<\/p>\n

The latest company garnering attention is an $8.8-billion coal company that\u2019s been around since the U.S. Civil War.<\/p>\n

Analysts at Deutsche Bank AG, Raymond James Financial and<\/i> Nomura Holdings estimate that a spinoff could trigger a 30% profit windfall for shareholders.<\/p>\n

Who doesn\u2019t want a piece of that action, right?<\/a><\/p>\n

Well, there’s always a dumb (read: risky) way and a smart way to go about things.<\/p>\n

Today, I want to share the latter with you\u2026
\n<\/a>
\nShow Me the Money<\/b><\/p>\n

The company at the epicenter of the latest bout of spinoff speculation is none other than CONSOL Energy<\/b> (CNX<\/a>).<\/p>\n

As I mentioned, the company has been mining coal since the U.S. Civil War. In recent years, though, it expanded into the booming natural gas business and now controls over approximately 750,000 acres of prime assets in the Marcellus shale formation.<\/p>\n

Now, CONSOL\u2019s coal and natural gas divisions are at different ends of the spectrum in the company\u2019s business cycle.<\/p>\n

The coals assets are mature and primarily produce cash, whereas the natural gas business is in the \u201cearly innings of a material growth mode,\u201d according to Curt Woodworth at Nomura.<\/p>\n

Generally speaking, income-producing assets and growth assets attract two different types of investors. Like oil and vinegar, they don\u2019t naturally mix well together.<\/p>\n

Or as Lucas Pipes at Brean Capital LLC says, \u201cThe gas guys don\u2019t really understand the coal business, and the coal guys don\u2019t really understand the gas business. So ultimately, this ought to be two separate companies.\u201d<\/p>\n

It appears that management might be waking up to this reality, too. Last week, the company announced that it\u2019s considering \u201call options\u201d to unlock the full value of its assets.<\/p>\n

Of course, those two simple words prompted every analyst and their mother to assume that CONSOL is considering a spinoff. In turn, they all whipped out their excel spreadsheets to compile a sum-of-the-parts model.<\/p>\n

Survey Says!<\/b><\/p>\n

At the low end, analysts believe that CONSOL is worth $39 per share, which isn\u2019t much higher than its current price.<\/p>\n

At the high end, they think the company could be worth $50 per share, which represents an attractive 30% upside.<\/p>\n

True to form, investors focused on the optimistic outlook and piled into shares. Don\u2019t be so eager to follow them, though.<\/p>\n

If the breakup never materializes, you\u2019ll be left holding a conglomerate that\u2019s destined to frustrate investors.<\/p>\n

Like the classic chicken versus egg debate, investors will always question whether CONSOL is an income-producing coal company or a rapidly growing natural gas company.<\/p>\n

In other words, without a spinoff or asset sale, the stock will never<\/i> trade at its true value.<\/p>\n

So how can we play the upside of a CONSOL breakup without exposing our portfolios to that risk?<\/p>\n

It\u2019s simple, really\u2026<\/p>\n

Take the money we would spend on purchasing shares outright, and split the capital evenly between the Market Vectors Coal ETF <\/b>(KOL<\/a>) and the Guggenheim Spin-Off ETF <\/b>(CSD<\/a>).<\/p>\n

Doing so will put us in a better spot, no matter what the company decides to do.<\/p>\n

Let\u2019s break it down so you see what I mean\u2026<\/p>\n

~Scenario 1: Spinoff Announced<\/b><\/p>\n

CONSOL represents the biggest holding in the KOL fund, at 8.73% of assets. So if a spinoff is announced, and shares pop, the fund is bound to enjoy a meaningful boost, too.<\/p>\n

Plus, as I told you earlier in the month, spinoffs<\/a> tend to outperform the broader market by an average of 13 full percentage points, according to Credit Suisse<\/b> (CS<\/a>). And since there\u2019s no doubt that the CSD fund will own a stake in any eventual CONSOL spinoff, this allows us to capture the additional upside after the breakup.<\/p>\n

What\u2019s more, we stand to profit from both funds while we wait for an official spinoff announcement.<\/p>\n

~Scenario 2: No Spinoff Announced<\/b><\/p>\n

If CONSOL decides against breaking up – no harm, no foul. We won\u2019t be stuck with a dead money investment in shares.<\/p>\n

Instead, we\u2019ll own a portfolio of undervalued coal companies that are springing back to life. (Since August 7, the KOL fund is up almost 15%, compared to only a 3% rise for the S&P 500 Index over the same period.)<\/p>\n

We\u2019ll also own a portfolio of up to 40 of the market\u2019s most compelling spinoffs via the CSD fund. No guesswork involved. As I\u2019ve shared before, it\u2019s dramatically outperforming the broader stock market this year, too. And all signs point to that trend continuing.<\/p>\n

Bottom line: I believe CONSOL will ultimately find a way to unlock the hidden value for its shareholders. But there\u2019s more than one way to profit from it. I prefer an investment that both reduces my risk, and allows me to profit while I wait.<\/p>\n

How about you?<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

The post A Can\u2019t Lose Way to Profit From the Next Corporate Spinoff<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

Article By WallStreetDaily.com<\/u><\/a><\/p>\n

Original Article: A Can\u2019t Lose Way to Profit From the Next Corporate Spinoff<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com After a dearth of activity in the early stages of the bull market, corporations now appear dead set on unlocking hidden value via spinoffs. Case in point: Two dozen deals have already been completed this year. And at least another two dozen are officially in the works, including American Express & Co.\u2019s (AXP) … <\/p>\n

Continue reading “A Can\u2019t Lose Way to Profit From the Next Corporate Spinoff”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-43288","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/43288","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=43288"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/43288\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=43288"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=43288"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=43288"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}